Capstone Partners, a leading middle market investment banking firm, released its October 2023 Automotive Aftermarket Sector Update, reporting that an aging U.S. car parc, growing miles traveled and increased vehicle complexity have underpinned robust demand across many automotive aftermarket subsectors. Higher borrowing costs and vehicle prices have discouraged many consumers from purchasing a new vehicle, contributing to record forecasts for the average vehicle age to reach 12.3 years in 2023, according to Hedges & Company. Older cars on the road have inherently led to greater demand for nondiscretionary aftermarket replacement parts and services.
Moving through the second half of the year and into 2024, demand for automotive aftermarket services and replacement parts is expected to remain healthy. The shift to more nondiscretionary services is likely to remain even while economic forecasts remain uncertain. The strength of the automotive aftermarket can also be underscored by the ample merger and acquisition (M&A) appetite for quality targets by financial and strategic buyers. Despite an elevated cost of borrowing, private equity firms have been keen to deploy capital to establish new platforms or add onto existing portfolio companies. The overall M&A market remains tepid, however, high-quality aftermarket service providers have continued to garner substantial acquirer interest.
M&A volume in the automotive aftermarket sector has moderated from the heightened levels in the prior year, declining to 230 transactions through year-to-date (YTD) October 2023 from 310 deals in YTD October 2022. However, sector deal volume is expected to accelerate in the coming quarters and through 2024 as broader M&A markets emerge from a relative trough in dealmaking. While high quality retailers, distributors and parts suppliers have captured healthy buyer appetite, targets in the services segment have witnessed significant strategic and private equity interest. As supply chains have normalized and demand has remained robust, prospective sellers with recurring revenue, a sticky customer base and defensible gross margins are poised to generate the greatest buyer attention.
“In 2023, there was largely a shift in aftermarket M&A away from highly discretionary and enthusiast businesses toward more nondiscretionary services (general repair, collision, glass) and replacement part suppliers and distributors,” said Yogesh Punjabi, managing director of Capstone. “We expect this trend to continue into 2024 given the highly fragmented market, but cautiously anticipate enthusiast-oriented M&A to restart once rates stabilize and consumer sentiment improves.”
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