Industrials: Finding the value in TICC

Whilst the overall industrials sector has been subdued in the last year, there has been strong interest in businesses offering Testing, Inspection, Certification, & Compliance (TICC) services across a range of sectors. This brief note sets out how to think about finding value in TICC.

The underlying principle of the TICC market is to ensure compliance with sector standards, from e.g. verifying the safety of consumer goods or building products to ensuring conformity of industrial processes or agricultural products to regulatory standards of industrial processes.

Whilst sub-sectors such as fire safety have generated a lot of interest from the PE community recently, interesting niche TICC businesses can be found across all industrials sectors, and many weathered the impact of Covid-19.

Impact of the downturn on the verticals that TICC serves (non-exhaustive)

Investors are also attracted by the potential for recurring (or at the very least repeat) revenue, and the viability of a buy-and-build strategy in a sub-sector or across verticals given the generally fragmented nature of the UK and international TICC sector.

However, TICC is not without its challenges for investors. The basic TICC proposition in many sectors is relatively commoditised, and differentiation can be difficult. Due to the essential nature of TICC services it can also be difficult to build an organic growth story in many sub-sectors and verticals – by definition, if a service is essential the market is likely to already be fully penetrated, with limited white space.

TICC investment considerations

Given the nature of the TICC sector, Armstrong would advise considering the following questions when assessing a potential target:

  • Market demand – Is the end market growing, or at least stable? Why is this area of TICC going to show strong organic growth (e.g. shift to preventative versus reactive maintenance, more stringent regulatory environment)? Can the business move into adjacent sub-sectors and verticals?
  • Resilience – Is this area of TICC truly resilient? Is it fully resilient (i.e. ongoing essential), or can these services be deferred? The impact of Covid is likely to be a good litmus test for this.
  • Differentiation – How does the business differentiate? Does it have anything unique, beyond competitive pricing and customer service? However given the poor quality of many TICC operators, the importance of strong customer service shouldn’t be underestimated!
  • Operational model – Given that many areas of TICC remain about ‘boots on the ground’, how spread out geographically are the company’s customers, and what does this mean for engineer utilisation?
  • Technology – is there opportunity for technology disruption in this area of TICC? If so, does the business have plans to develop in this area? How well developed are these plans? Can the business leverage technology to extend its service offering within existing customers, or to deliver it “better, faster, cheaper”?
  • Organic growth – Given the fully penetrated nature of most TICC sectors, and low churn rates, how is the business going to grow organically?
  • Buy and build strategy – Many providers of TICC services are small local businesses with owners reaching retirement age – it may make sense on paper to combine these niche services, but bolt-ons need a platform to grow from. Is the business suitable as a platform? What complementary services could be added to the business, or how could it extend its geographical footprint? Are the buy and build targets attractive to bolt on to a larger platform, and can management/PE focus improve them?

Armstrong has helped several investors answer these and similar questions on recent TICC deals. To find out more about TICC or other Industrial opportunities please contact:

Matt McNally

+44 7894 736 523
[email protected]

Email Matt