No one writes books about a certain type of business. Fasteners, electrical parts, hydraulic fittings, valves, packaging, and other items you wouldn’t notice unless they broke are sold there. When you enter one of these warehouses on the outskirts of Cleveland or Houston, you’ll see rows of metal shelving, a forklift beeping in the back, and a counter where dusty-booted contractors are courteously debating a part number. It is not glamorous at all. And private equity has been subtly setting up shop there.
The industry, which generates about seven trillion dollars in revenue in the US alone, was operated in the same manner for decades. ownership by the family. lengthy phone conversations. Sometimes invoices are on paper. According to MDM Distribution Intelligence, the industry recovered by about twenty-two percent in 2021 following the brief shock of 2020, when revenues fell by about five percent. People took notice of that type of bounce. Investors took notice. The dull no longer appeared dull.
Both the math and the moment were altered. In the past, private equity prevailed by squeezing balance sheets, refinancing debt at a low cost, and strategically timing exits. When exit windows remained open and interest rates remained low, that model performed flawlessly. Neither seems trustworthy anymore. Portfolio companies are being held by firms for longer than anticipated. This is viewed as a hassle by the conventional view. The playbook is being rewritten in real time, and industrial distribution just so happens to fit the new playbook exceptionally well, according to the deeper interpretation.
A PE-backed company that developed a digital platform for spot buys—the impulsive purchases made by contractors at three in the afternoon when something breaks on a jobsite—is a specialty distributor that keeps coming to mind. The website provides certification materials, training videos, and a customer interface that feels more like something from the consumer world than an ordering portal from 1998. Online ordering for consumable supplies increased from 24% prior to the pandemic to 54% by 2021, according to EY-Parthenon survey data. Entering one of these old branches and realizing how much of the old way still exists is the other part of the story.
Flexstone Partners, a Natixis affiliate that publicly describes itself as a “boring company lover,” enjoys discussing a bottle cap manufacturer that it supports. The caps are very small. It’s not the wine they seal. If the cap is damaged, the entire product is destroyed, giving the cap manufacturer a peculiar pricing power similar to Apple’s, but without anyone outside the industry being aware of the company’s existence. One of Flexstone’s managing partners, Nitin Gupta, characterizes the approach as hitting triples and doubles instead of home runs. There are many duplicates in industrial distribution.
The difficulties are genuine. Leveraged buyouts increase debt. Timelines are not always agreed upon by PE sponsors and founders. Things that took thirty years to build can be destroyed by integration after acquisition, and a five-year exit clock can force decisions that appear effective on a slide deck but are disastrous on the shop floor. It’s still unclear, and it probably depends on which company shows up at the door, whether the current wave of investment ends up improving these companies or just taking advantage of them.
As this develops, it’s difficult to ignore the fact that the most lucrative sectors of the economy consistently turn out to be the least exciting. That seems to have been figured out by the smart money. Nobody reads the parts catalog, the loading docks, or the shelves. One warehouse at a time, the next ten years of private equity returns are being quietly constructed there.