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As automakers ease off investment gas, private equity could rehome some assets

Ravaged by the coronavirus crisis, automakers are having to tread a fine line between conserving cash and safeguarding strategic investments in transformative technologies crucial for long-term success. This dilemma may present an opportunity for cash-rich private equity firms to pick up automotive industry assets at a bargain price.

The biggest risk to carmakers before the pandemic was simply that of standing still. One-time laggards in electrification, who dismissed it as unprofitable and impractical, have scrambled to incorporate hybrid and battery electric into their offerings as regulators turn against fossil fuels. Meanwhile, the big prizes of market leadership in shared mobility and self-driving cars are still up for grabs.

Now, as the novel coronavirus pushes automakers into what Volkswagen AG refers to as "task force mode" to protect the health of their employees and balance sheets, spending sacrifices that could impact these innovations will need to be judicious if they hope to win the battle for survival without losing ground in the longer-term technological war.

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"Now more than ever, our investments need to be targeted and based on sound judgment," Bayerische Motoren Werke AG CFO Nicolas Peter said on a May 6 earnings call. The German company said investments would fall below €4 billion in 2020 from nearly €5.7 billion in 2019. Many of its peers have announced similar cutbacks.

Carmakers may look to trim their broadening range of technology investments, starting with those furthest removed from the actual making of vehicles, according to David Riemenschneider, automotive adviser at investment bank GCA Altium. That could make the crowded field of app-based mobility services a candidate for pruning, as General Motors Co.'s shuttering of its Maven car-sharing business would indicate.

"I think they're going to go sort of back to basics. ... Everybody has made some crazy bets in the mobility space and those are the easiest to spin out. It doesn't affect your core technology platform for the architecture of your vehicles. So I'm looking for some ... a lot of mobility assets to be coming up on the market," Riemenschneider said.

Some of the investments automakers have made, such as electric scooter fleets, were more about gaining a foothold within the mobility-as-a-service segment to make it easier to deploy new products later on with a pool of customers already established, Riemenschneider said.

"Things were getting a little bit silly in terms of valuations, the type of technologies and the maturity of the technologies and the prices that they were selling for. This is a reset button."

Dry powder

With plenty of money amassed after years of favorable fundraising conditions, private equity firms could pick up some of these companies as bolt-ons to their existing businesses in the hope of unlocking more value through economies of scale, Riemenschneider said.

The three sources interviewed for this story said there were few deals to point to at this early stage, but discussions with clients and inquiries they had handled demonstrated heightened interest in dealmaking.

"I'm shopping," Riemenschneider said, who also is chairman of Autofutura, a U.K.-based automotive retail software company backed by Inflexion Pvt. Equity Partners LLP.

READ MORE: Sign up for our weekly coronavirus newsletter here, and read our latest coverage on the crisis here.

David McShane, executive vice president for corporate partnerships at Autotech Ventures, said that while some well-funded firms are on the lookout for opportunities, the marketplace is "a mixed bag" as even the prospect of a bargain is not always enough to lure buyers at a time of such uncertainty.

"It really depends on each of the companies. You get some companies that are actually in really, really good shape liquidity-wise. And they're looking at this as an opportunity," McShane said in an interview.

"So there's just different cultures. Some are looking at this as a real opportunity to kind of see what they can do, what companies they could afford, valuations, and things like that. There are some corporates in that position, too. And then there are some guys that have a more, shall we say, pessimistic view of what might happen in the industry. So they're hunkering down and preparing for a much longer-term recovery," he said.

Investors cool to ICEs

While the turmoil of the pandemic will create opportunities to snap up promising bolt-ons in automotive and mobility, appetite from private equity may be stronger in other sectors that are perceived to carry less risk, according to Ralph Von Selzam, managing director at investment bank Robert W. Baird.

The automotive industry's global sales downturn in the past two years and the risks inherent with the multiple technological shifts now underway have dimmed the sector's appeal for some when set against the broader global economic uncertainty. In the auto industry's favor, companies are carrying much lower levels of debt than they were during the crisis of 2008, Von Selzam said.

Another challenge is certain investors' reluctance to back businesses connected to internal combustion engine, or ICE, technology, he said. Some governments have scheduled bans on ICE passenger cars starting in the mid-2030s.

"There is definitely a focus by private equity to put money to work, but I definitely wouldn't call out the auto suppliers as the favorites in this," Von Selzam said. "A lot of them are very cautious with automotive. It's a perfect storm of uncertainty."

For the most ambitious entrepreneurs aiming to fundamentally transform how we travel, from electric scooters to flying taxis, the pandemic may have put those dreams on hold. Automakers have been a driving force in funding these most-risky of startups, aided in part by venture capital firms, but appetite from both parties for long-shots in this sector is diminishing.

"The venture funds are totally dried up," Riemenschneider said. "If the vehicle manufacturers and tier-one suppliers aren't there to basically take your idea to market right now, and we are seeing some slowdown there, and the venture capitals are not willing to step up their investment, what you're looking at is that a lot of these small companies just don't make it."