PRI: Special Report: Private Equity In Motorsports – MiddleGround Capital
June 2, 2022

PRI: Special Report: Private Equity In Motorsports

Original Article can be viewed here.


Racers who don’t make a habit of paying attention to business media might be surprised to learn there’s a quiet financial revolution going on in the background of the motorsports industry. Many of the companies and brands that racers grew up with, including legendary brands that originated in modest garages and still carry the founder’s name on the box, have been acquired by private equity firms and often combined with other companies to form “super brands” that control large sections of the market.

These iconic racing brands are still out there producing quality parts, but they are no longer the independent mavericks of popular lore. What does this shift in ownership mean for the motorsports industry at large?

This private equity interest is not entirely new, but in the last couple of years the pace has accelerated. In February of this year, New York City-based MidOcean Partners acquired timing drive manufacturer Cloyes from private equity firm Hidden Harbor Capital Partners, which has held Cloyes since 2018. Taglich Private Equity, another New York City firm, acquired Air Flow Research and SCAT Enterprises in 2021.

Industrial Opportunity Partners (IOP), based in Evanston, Illinois, invests in middle-market companies in North America, which are defined as companies with between $50 million and $500 million in revenue. It added COMP Cams to its portfolio in early 2020. IOP folded the COMP companies into the Edelbrock Group, forming a larger entity that includes performance brands such as Russell, TCI Automotive, FAST, and RHS.

MiddleGround Capital (MGC), with offices in Lexington, Kentucky, and New York, New York, targets lower middle-market companies. It currently owns 11 companies, including Race Winning Brands, which it acquired in late 2021. Race Winning Brands includes heavy hitters such as Dart Machinery, Wiseco, Manley, and JE Pistons.

Greenbriar Equity Group of Rye, New York, announced in February that it had acquired a majority position in Ohio-based JEGS Automotive, which had been in family hands since 1960. All told, these five private equity firms alone own outright or majority control of nearly 30 aftermarket performance companies.

Some might find it surprising that relatively small brands that appeal primarily to gearheads, with advertising more commonly limited to sponsorship stickers on race cars than national TV ads, would appeal to the centers of high finance. But from other perspectives, it’s not that surprising at all.

“It was only a matter of time before private equity noticed the motorsports industry,” said Daniel Ingber, PRI’s Vice President of Government and Legal Affairs. “PRI Members are some of the most innovative and entrepreneurial businesses in the world and know their products and their customers extremely well. Most of our Members are small businesses that are attractive to private equity.”

Hart Marx Advisors in San Rafael, California, specializes in mergers, acquisitions, divestitures, and succession plans in the automotive and heavy-duty trucking industries. It has seen firsthand the factors that make motorsports companies attractive investments for private equity.

“The brands tend to develop really strong followings, so it’s a good base for an investor to be able to grow from,” said Chris Bovis of Hart Marx Advisors. “If you have a good company, making pistons, valves, whatever, and you have a whole contingent of engine builders who swear by your products and have been using them for 30 years, that trust in the quality of that brand has been built up. That’s a tremendous platform to grow from. It makes it very difficult to break in, so it does provide a bit of a barrier to entry.”

Those hard-earned reputations established at the race track do tend to attract notice far beyond the paddock. “That equity in the company, the brand, it’s hard to define and it’s probably impossible to value,” Bovis said. “But it’s extremely hard to create. It’s something that happens over time. If you’re a valve spring company that’s been building quality products for 30 or 40 years, and you’ve developed that following, a private equity firm would look very kindly on that and see that as very attractive. No private equity has the time or interest in investing 40 years to build that up themselves.”

Beyond the brand equity, the appeal of performance parts manufacturers makes sense from a nuts-and-bolts financial perspective. “The performance automotive and powersports aftermarket segment has been an attractive asset class to private equity for several reasons,” said Mike Bridge of MiddleGround Capital. “First, there is sustainable end market growth, with the automotive performance segment growing at a historical compound annual growth rate of 2–3% and the powersports segment growing at 4–7%, which we anticipate continuing for the foreseeable future. Second, these companies often boast strong financial profiles with high margins, limited capital expenditures, and high free cash flow. Third, consumers still tend to pursue their hobbies and passions, even in a recessionary environment. Furthermore, customer relationships tend to be very sticky, as consumers stay loyal to quality brands. Fourth, this is a highly fragmented market comprised of companies that are typically founder owned, providing a robust acquisition pipeline of businesses that can benefit from operational best practices and additional capital to fuel growth.”

There are other factors that make performance products manufacturers attractive to private equity that are not readily apparent to the fan in the stands. “Given the plethora of deals in the industry for lower- and middle-market companies, I believe that private equity firms are seeing a nice diversity to perhaps a portfolio they may already be holding in transportation, that the performance aftermarket brings to establishing a balance,” said Phil Fioravante, Operating Principal with Industrial Opportunity Partners, owners of the Edelbrock Group. Although it’s not a strategy that IOP currently employs, Fioravante said, equity investors may have investments in Tier 1 OEMs, heavy trucking, or powersports companies, with motorsports companies attractive as final pieces of the transportation puzzle.

“I truly believe, in terms of a balanced pie chart, if you will, that the performance aftermarket is becoming increasingly something on peoples’ radar screens to balance out the cyclical nature of the other three,” he said.

Although these transactions for motorsports brands usually boil down to the money that can be made, that’s not always the primary motivator when a company allows itself to be sold. “The decisions that we see from the companies that we deal with tend to be very personal,” said Bovis with Hart Marx Advisors. “They tend to be family oriented—what’s in the best interest of the family?

“Probably the most common reason for owner-founder businesses, which is primarily what we deal with, is they oftentimes don’t have a next generation to pass the business to, or the next generation is a firefighter, a lawyer, they’ve found their own path and haven’t really had the interest in the family business,” Bovis continued. “It starts to become an economic question of not just what’s best for the family, but also what’s best for the business. In a lot of cases, they’ve invested 40 or 50 years of their life into these companies, in developing the brand that’s so tied to who they are personally, that just closing down is unthinkable from an emotional perspective. It’s unthinkable from the perspective of what it would mean to their employees. They want to create a home and a future for their employees that have given so much to the business. It’s a blend of emotion and rational financial planning.

“I would say the trend we’re seeing is that fewer and fewer members of that next generation are interested in carrying on the business. That tends to be rarer than I think it has been in the past,” Bovis added.

Is this consolidation of brands good for the motorsports industry? History teaches that, in a general sense, a reduction of true competition usually doesn’t work to the benefit of the end customer. Employees are sometimes shed to deal with “redundancies” as companies are merged together. Relocations can transform communities. And if the last couple of years has taught the world anything, it is that larger corporations will often feel pressured to enforce government dictates whether they are good for an industry or not.

But there are obvious upsides, too. Private equity investment in a business that is treading water means access to capital for expansion, modernizing equipment, and breaking into new markets, plus expertise for navigating the digital age and avoiding legal minefields.

“My experience, in my career, it was quite good for the company,” Bovis said. “I worked for a company that was struggling until it was purchased by private equity. They put in a lot of resources. They have expertise that we were able to take advantage of to grow the business, and the company is on very strong footing now. The brand is back, and the products are back, and everything has worked out very well. So I’m very biased toward seeing that side of things because that’s been my experience. I see a lot of companies and brands that couldn’t have negotiated and managed their way through their growth quite as well.”

A big-picture view from private equity can also lead to improvements on the shop floor. “MGC is unique when it comes to how we support the employees of all our businesses,” Bridge said. “First and foremost, we bring first-hand experience to our approach on safety and the physical working conditions in all our investments. We expect facilities to be clean, bright, and free of un-protected critical safety risks. Second, we desire for all our employees to earn a livable wage, which is why last year all our portfolio companies enacted a minimum pay rate of $15 per hour. Although most of the employees across our portfolio make much more, we saw this as a good starting point. By 2025, we seek to increase our minimum pay rate to $25 per hour. We feel this will allow us to attract and retain top talent.

“Our motto is to ‘leave everything better than we found it.’ We are not perfect, but we are proud that we are not a firm that makes money on the backs of others,” Bridge said.

Combining companies with distinct cultures into a larger organization is a challenge all private equity firms face, but most have experience in that aspect of operations. “Typically, our perspective and approach is the development of an operating plan or an operating thesis upon initial investment,” IOP’s Fioravante said. “In this case we knew how Edelbrock was performing and performing well. We know that COMP Cams is performing and performing well. We were looking at one plus one is three. By instituting the IOP operating thesis that we reviewed with Edelbrock, and we reviewed with the new team at COMP, we started working through synergies that I call ‘people, process, and products.’

“From the people perspective, with the merging of two organizations, do we end up having some redundancies? Then we sort that out, and some of it happens through attrition. There were no forced layoffs. It was happening over time; it’s been almost two years. There are a lot of great technology leaders on both sides. We brought in some new thinkers from outside the two companies, and it has been a great addition to our product management and our engineering team. Most of the leadership today at Edelbrock Group is primarily COMP Cams folks. At the senior level, the CEO is from outside of the industry, the CFO is from outside of the industry, the chief commercial officer, Chris Douglas, has the largest portion of our organization. Our chief operating officer role, that will be a new role for us here in the coming weeks. From a synergistic operating thesis plan, everybody gets together, and we try to figure out what we can gain by doing this, what can we gain by doing that.”

The motorsports world is full of stories about entrepreneurial racers who started building parts out of modest shops and garages, creating their future empires through word of mouth, one sale at a time. Preserving that independent spirit is a crucial part of maintaining a brand’s reputation. “Private equity has upsides and downsides for the industry,” PRI’s Ingber said. “It can help some companies reach their full potential, but when private equity companies ignore the judgment and expertise of the individuals who built the company, who know the product, who know their customer and are passionate about motorsports, it can change a company, brand, or product in bad ways.”

The people we spoke with seemed aware of that potential danger and appear to be taking a hands-off approach to how to best meet the needs of the racer. “We partner with the management team and employees. Our role is to make sure the team has the resources needed to execute their vision and strategy,” MiddleGround Capital’s Bridge said. “The Race Winning Brands management team has deep roots in the industry with some brilliant minds leading engineering and R&D. The goal of our operations team is to give the management team incremental resources to execute on discrete initiatives to free up their time to continue doing what has made this company great.”

The infusion of capital can lead to an increase in new parts on the shelves as companies gain resources. “From a products perspective, we’ve been developing some really cool new products like black chrome intake manifolds and carburetors,” Fioravante said. “We launched a whole lifter assembly at the PRI Show that’s getting rave reviews. So we saw a lot of synergies and we’re continuing to work through the branding.”

“There are different sizes and phases of businesses that require different resources and skills and different capabilities,” Bovis explained. “There’s the financial side of things. The financial resources necessary to buy the inventory, to fund the marketing, to grow a national footprint in terms of sales or dealers, that takes time and money. In a lot of cases, private equity has access to those resources, be it direct investment or however they want to structure it. But they bring that next level of financial sophistication and financial resources. They tend not to be experts in any one particular field, but they tend to be experts in growing businesses and helping fund and manage through the challenges of growth and adding staff and adding resources. As businesses grow from family-owned or generational businesses to first level of professional investment, they do tend to get a little bit of sophistication on managing through the challenges of that growth.”

There’s more at stake than just funding new products. Private equity conglomerates have the ability to shepherd performance brands into entirely new financial realms. Holley Performance Products, controlled by Sentinel Capital Partners, in 2021 merged with Empower Ltd. for the purpose of becoming a publicly traded company. With private equity backing, Holley is now listed on the New York Stock Exchange (HLLY).

Private equity interest in the performance aftermarket appears to be here to stay, at least for the foreseeable future. “Certainly, there will be more and more competition for fewer and fewer really good companies and brands. There’s been a lot of consolidation among maybe three or four major players,” Bovis said. “To the extent that there are good companies and good brands and good market niches to pursue, then yeah, it will continue.

“This is highly speculative, out on a ledge a little bit, but where I think there is probably more to be gained is these adjacent markets. Much like SEMA and PRI saw a connection between their core audiences, you see some of the big private equity conglomerates start to see a crossover between the SEMA and PRI crowds and the powersports markets—ATV, UTV, motorcycle, maybe to a lesser extent personal watercraft and some of those things. You’ll start to see them pick up and have increased interest in some of these adjacent markets that still have the core attributes of an emotionally connected enthusiast buyer, a true outlet for the end-user, the passionate hobbyist, premium products with good margins and good performing businesses. I think you’ll start to see more of a reach out to these adjacent markets,” he added.

Although many top names in the performance aftermarket have been snatched up by private equity investors, the industry is constantly evolving and creating opportunities for the next generation. “There’s an emotional side, where you wish the products were still being built out of somebody’s garage, that romantic, entrepreneurial side of things. You wish that was still around in some of these companies, but it’s around in different companies. There are still companies being built today out of peoples’ garages and basements. We just haven’t seen them grow to national status yet. They’re in the process of doing that,” Bovis said.

“There are some things in my life that I don’t even know who we’re buying a product from,” he added. “Half the time I forget who my cell phone provider is. It’s just an anonymous company that I only know about when something goes sideways. But I know everything that’s in my race car. I know every part we buy, I know the company, I know who we buy it from. It’s such an unusual market and industry in that regard. You’re so close to the customer. I couldn’t imagine anything better for a private equity group.”