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Any investment
carries a degree
of risk and an
investment into
the Precision
Engineering
asset class is
no exception.
GENERAL MARKET
CONDITIONS
The correlation between general
market conditions and engineering,
largely through its connection to
manufacturing, has already been
identified and consequently, any
recessionary events in the wider market
are likely to have a negative effect on
Precision Engineering. Nevertheless,
there are mitigating factors and drivers
which are beneficial to Precision
Engineering, even in times of economic
downturn, including the on-going
need for maintenance, the potential
demand for refurbishing and fixing,
rather than renewing and the pressures
on customers to minimise costs and
increase efficiencies which fuels a need
for adjusted components. These are just
the types of specialist jobs undertaken
by Precision Engineers. Although,
when sudden market corrections take
hold, which was the case in 2008, the
chances of a negative influence on
Precision Engineering are strong. That
said, when general economic cycles
are more predictable, those who have
the expertise are well placed to take
advantage of improving conditions,
greater availability of money, and
increasing demand for specialised
parts built to exacting standards and
accuracy. As the economy grows,
demand for products increases and so
does demand for the input of Precision
Engineers into them.
CONCENTRATION RISK
It is always advisable to spread risk by
diversifying across a range of sectors
– some of which may be correlated
and some uncorrelated to general
market conditions so that drops in
one section of the portfolio may be
offset by increases in another. For
this reason, investing solely in any
single asset class carries significant
risk, although on the other side of
the equation, it carries the potential
of significant gains if the optimum
conditions exist. This type of risk profile
is very unlikely to be for inexperienced
or non-professional investors.
Therefore, diversification across asset
classes to minimise risk is a sensible
option, but so too is diversification within
the Precision Engineering asset class
itself; the engineering sector depends on
the capital expenditure of key industries
such as aerospace, automotive, defence
and energy, which is usually linked to
future growth expectations. The oil and
gas market has recently plummeted,
leading to a slow-down in money
available in that sector and slow-down
of work for companies specifically
focused on this Precision Engineering
market segment. Nevertheless,
companies that are diversified across
sectors and not specific to one high
tech industry or technology, have the
benefit of the machinery, premises and
work force being immediately applicable
to other industry sectors. An example
of this is the machinery that makes
bespoke drilling tools for the oil and
gas exploration market is the same
machinery that services the automotive
and aerospace market. One company
with the flexibility to adapt its machines
and processes to multiple markets
is Beech Precision Engineering Ltd
which currently uses its dedicated CNC
(Computer Numerical Control machines
are a very common piece of equipment
in Precision Engineering factories)
workshop, and Computer Aided Design/
Computer Aided Manufacturing
(CAD/CAM) to service the automotive
and pharmaceutical industries. This
flexibility allows companies to adapt
to growth in some markets and
temporary recessions in others.
Some investment products are
structured to benefit from such
sector diversification, with Cyrus IM’s
Chairman, David Hitchcock seeing the
plus points of a strategy that invests,
“in a basket of different Precision
Engineering businesses which in turn
service different industries to provide
investors with diversification of
‘industry risk’”.
Firms servicing a single business do not
have that luxury or risk mitigation and
nor do they have a fall-back position in
the event of their customer closing down
or simply deciding to change suppliers.
RELIABLE DATA
AND INDICES
Data can be found through market
intelligence and research companies
online such as Mergermarket,
CapitalIQ, and Bloomberg. Of these,
Mergermarket and Bloomberg will
publish all information on deals
that are verifiable from press
releases, company filings, investor
reports etc., whilst CapitalIQ also
attempts to estimate deal sizes.
However, some unverified deals are
not recorded and piecing together
this information may be difficult
for the ‘layperson’ as there are no
specific single indices showing past
or present performance. Most deals
historically have been via private
investment and therefore not disclosed
which makes past information and
investment activity levels difficult
to assess. This takes some research
and knowledge and the likelihood of
identifying success or failure rates
is restricted by the participants
in the deal either not wishing or
being unable to disclose such data,
particularly if it is of a negative nature.
Nevertheless, research has identified
at least 25 deals for the acquisition of
Precision Engineering entities since April
2014 ranging in value from four million
to several hundred million pounds.
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RISKS
