Nick Brainsby, partner at Pemberton Capital, discusses the importance of investing in capital equipment.
The purse strings have definitely been loosened by UK manufacturing, fuelled predominantly by demand from both home and abroad for new products and escalating volumes.
Whisper it quietly; the banks and other funding houses appear to be listening. Yes, the tap isn’t flowing as freely as we would all like, but there is a renewed confidence present that suggests engineering firms are no longer seen as the ‘proverbial last throw of the dice’.
And SME manufacturers are responding. A recent MAS Barometer highlighted that 86% of respondents were set to invest in capital equipment, spending on average £121,000 in the next twelve months.
Whilst this figure isn’t overwhelming in isolation, it becomes a lot more striking when you extrapolate it across the 80,000+ companies that make up UK industry.
Importantly, it also signifies a massive step-change in business strategy, suggesting that our firms are once again planning for the long-term. Is sustainable growth returning? The answer appears to be yes.
As investors who have carved out a career in turning around the fortunes of underperforming SME manufacturers, it is a trend we welcome with open arms.
For too long we have seen the damage caused by a lack of investment in new kit and machinery. It hampers competitiveness, causes output issues and, before long, will erode your USPs when selling to existing and new customers.
This is not a criticism of manufacturers either. During the downturn, management teams saw orders disappear overnight, margins squeezed to an inch of being profitable and very tight credit. Holding back was often the only option at a time when many firms were fighting to survive.
But now is the time to hold on and enjoy the ride that is the recovery and our companies will only be successful if they operate at world class standards and this requires the best people and the best cap-ex.
We’ve embraced this approach with the companies we invest in, including Aluminum Shapes, Applied Component Technology, Windmill Extrusions and Mathiesons Bakery in Scotland.
Each of these businesses have their own three and five-year investment plans that have a fair amount of capital expenditure locked in.
The results are encouraging, with order books rising and new opportunities arriving by the week.
We’re not spending for spending’s sake, but we are speculating to accumulate.