Private equity IME themes of 2022 and beyond

Garage doors

An executive at a Canadian garage door specialist said there has been a 90-94% increase in the cost of materials, driven by foam, steel and spring shortages. The number of SKUs has also risen over the past 20 years as homeowners have become increasingly interested in styling their garage doors, in turn reducing replacement cycles. The specialist noted that margins can erode quickly in the garage door industry and believes recent earnings seem “like peak EBITDA”.

They said the industry is therefore expecting a degree of pull-back. “What happens when demand decreases, which everyone is anticipating, the supply chain fixes itself and everybody has way more capacity?” The expert expects “a couple more” M&A transactions on the manufacturers’ side and “more consolidation on the dealers’ side” in the next 12-18 months as demand begins to slow.

Space debris removal and setellies

The space debris market is a growing ecosystem and in 10-15 years there could be a “fully circular economy” that includes repairing and recycling of satellites in orbit. There have also been significant strides in policy regarding sustainability, debris removal and servicing in recent years. An executive at a Japan-based orbital debris removal company noted there are about 30,000 pieces of space debris larger than 10cm, several hundred thousand <10cm, and hundreds of millions of tiny pieces of debris <1cm currently in orbit.

Failed satellites pose the biggest risk because they cannot be controlled, with the specialist noting that if preventive actions are not taken soon, collisions could rise “exponentially”. Key players to watch include LeoLabs, ExoAnalytic Solutions, Privateer Space, AGI, Astroscale, Surrey Space, D-Orbit, ClearSpace and Orbit Fab.

Meanwhile, SpaceX blasted over 2,000 Starlink satellites into space at the start of the year as it continues to build its 4,408-strong constellation. A former senior executive at SpaceX said it is on “a good path” to finish its constellation, but that getting approval for another 30,000 satellites is raising “concern” in Washington. They described SpaceX’s ability to build eight satellites per day and carry approximately 60 satellites per launch as “extraordinary”. However, production volume is still the limiting factor at present. Smaller satellites, easier access to space and an “insatiable” TAM for broadband are driving this new wave of satellite installation.

3D house printing

Buildings worldwide account for 40% of carbon emissions, according to an executive at a sustainable residential real estate developer, and 3D printing is the next step in the evolution of manufacturing at large. When it comes to 3D house printing, the key advantages are speed and waste reduction, while the greatest challenges are regulatory hurdles and cost. As we heard, the key to lowering manufacturing cost is scalability, which is not there yet for 3D printing but “is happening as we speak”.

With the off-site prefabricated process, a home could be manufactured in one month in a factory and then installed in 1-2 months, the specialist said. This reduces the building process to three months vs seven months when building a traditional home on-site. The specialist said the East Coast and New York are hotspots for new projects, driven by cost competition. Home builders are expected to increase their 3D manufacturing capabilities over time “significantly”, with sustainability ultimately the industry’s biggest growth catalyst.

Renewable fuels feedstock

We spoke to a SVP at a California- based producer of renewable fuels about renewable fuels, and among their key insights was that feedstock prices have tripled over the past few years to USD .70-.80/pound, driven primarily by the renewable fuels industry. “There have been a few prominent large renewable diesel plants that have been constructed and are now operating today and they consume these feedstocks.” Although feedstock suppliers generally sell on a spot basis, this could change as renewable diesel plants demonstrate their consistent economics and feedstock producers enter into longer- term contracts.

“At that time, you’ll probably see some of the larger feedstock producers, more so than what’s been done so far, align themselves with the major renewable diesel producers, potentially JV’ing projects or contracting relationships under long- term feedstock arrangements.” Demand for renewable diesel is “significantly” greater than the feedstocks available, creating the conditions for consolidation. The expert added that a significant amount of cover crops are being developed that they believe “will lead to the largest growth of feedstocks”. They also see strong growth in the used cooking oil and animal fat markets as aggregators put systems in place to collect those feedstocks.

Carbon capture and storage

Carbon capture and storage is playing an increasingly pivotal role in the reduction of global emissions. Direct air capture (DAC), where carbon is captured directly in the ambient air using a filter or solvent, is “ready” but “expensive”, according to a former adviser to Royal Dutch Shell. Last year, Climeworks launched Orca, the world’s first and largest DAC and storage plant, making large-scale carbon dioxide removal a reality.

The current business model for companies involved in CCS and DAC projects mostly operate on government incentives and carbon credits, the specialist told us. However, they said this could change to include selling high-purity CO2 to food and beverage companies or to energy companies that can combine it with green hydrogen to make alternative fuel. For this to become viable, the specialist said the costs of CCS need to be reduced by USD 50-100 per tonne. The specialist said they were confident this can be achieved, given the pressure on companies by investors to reduce their carbon footprint, as well as continued government efforts to incentivise investment in CCS. “These emerging new opportunities for innovation from different players may accelerate the development of direct air capture,” the specialist told us. “I’m very sure, by 2030, we may be able to make large-scale direct air capture possible.”

EV battery space

PE investors are also showing heightened interest in the EV battery space. An executive at a technical consulting firm said that EV markets in general and battery development have crossed a threshold of momentum that “will not cease”. The 2021 market size in North America “went into USD 68.9bn” and the revenue forecast is USD 216.5bn by 2028, with a growth rate of 19% from 2022-2028. The OEMs that have exposure to lithium, nickel, cobalt, aluminium and manganese – which are essential for EV battery production – will be best placed for success.

We also heard that solid-state batteries are likely to be operational by 2025. The specialist predicted the technology should help double the energy density of batteries to 400 watt-hours per kilogram – a “significant” accomplishment.

Click here to access the full report, Private equity themes of 2022 and beyond.