The rise of the industrial compounder: A developing exit route for UK manufacturers

A growing wave of Nordic-style industrial compounders is giving UK manufacturers an exit option, beyond trade and private equity. Nick Gillott explains why these long-term investors are targeting UK assets and what they are looking for. 

We recently advised on the sale of a niche UK manufacturer. The mix of suitors might surprise you: more than a dozen offers, trade buyers were in the minority. The rest came from a category of acquirer that, over five years ago, barely featured in these conversations at all: the industrial compounder – a holding company that acquires assets for the long term, sometimes with no intention to sell them, with a view to reinvesting the cash flow into acquiring more businesses.

An alternative to private equity and trade buyers

For years, owners of profitable, but modestly growing industrial businesses, had one realistic exit: a trade sale.

Private equity overlooked them, because it typically needs stronger growth rates to deliver its hurdle returns, alongside a management team in place that will drive the business through its ownership.

Plenty of good businesses, generating solid, yet less spectacular annual growth rates, simply did not meet the bar.

And several were too niche to even attract trade buyers, despite being profitable, well-established and, in most cases, family-owned or founder-led.

Today, those same businesses are attracting serious, competitive interest from a growing pool of permanent-capital buyers or ‘compounders’.

These offer something a private equity house or a large trade acquirer sometimes cannot: continuity, for the brand, the team, and often the founder’s legacy.

What exactly is a compounder?

There isn't a tidy definition of an industrial compounder. They sit on a spectrum: family offices, private capital vehicles, and listed groups, such as Scandinavia’s Lagercrantz, Lifco and Röko. To add an extra layer of complication, some are private equity-backed, such as the UK’s CorpAcq, which is backed by TDR Capital.

They are united in behaviour rather than structure. Unlike private equity, they hold businesses, often on an evergreen basis, with no fund life or pressure to exit after three to five years. They are drawn to the cash a solid business generates, which they reinvest to grow their wider portfolio.

Critically, unlike some trade buyers, they tend not to consolidate what they buy. Acquired companies typically keep their name, their brand and their management team, operating much as they did before.