Industrial markets are often shaped by changing economic cycles, shifting policies, and advances in technology. But one sector stands out for its stability and sustained long-term growth: test and measurement. It offers investors a rare combination of resilient demand, segments with strong growth potential, and multiple transformational routes for value creation.
The global test & measurement equipment market is worth around $38 billion and is expected to grow by ~4-5% for the rest of this decade. If you include the associated components, connectivity, and software solutions used alongside the equipment, the market is even larger. The space contains numerous high-margin, high-growth segments, often served by small to mid-sized specialist suppliers. These businesses typically have deep expertise and offer highly technical solutions to a sticky customer base, making them attractive investment opportunities with numerous avenues for value creation.
Navigating the vast test & measurement landscape
Test and measurement is a broad and varied space, offering multiple entry points for investors. However, its diversity can make it difficult to define and assess. Pinpointing the most promising opportunities requires a structured lens. When considering where to play, it is helpful to consider three key dimensions to determine where to focus, how a business is positioned, and the key investment considerations.
- Position in the value chain
Test and measurement businesses typically play across one or more areas in the value chain:
- Components (e.g., sensors)
- Instruments (e.g., testing equipment)
- Data and connectivity (e.g., wireless gateways)
- Software (e.g., analytics)
Where a business sits in the value chain determines the nature of its customer base, value proposition, go-to-market strategy and growth levers.
- End-markets served
Test and measurement solutions are used across almost every industry. Key sectors such as telecommunications, automotive, aerospace & defense and industrials tend to offer the most sizable opportunities. Each sector has distinct demand drivers, market structure dynamics, and customer landscapes that shape where and how a business can thrive.
- Application and technology
Test and measurement solutions are applied in many different ways – from assessing power, temperature, level and flow rates to measuring dimensions, chemical makeup, radio frequencies, vibration and more. Understanding what is being measured, how it is measured, the application, and the complexity involved is essential. The more specialized, precise or hard-to-replicate the technology, the stronger the value proposition and the more defensible the supplier’s position.
What makes an attractive investment
While the sector is broad, and there are often unique asset considerations, there are several common characteristics of highly attractive businesses.
- Mission-critical applications
Test and measurement solutions often represent a small part of an end-users operational costs, but are critical to operations. Failure can bring significant risks and high costs. Providers that support the most risk-averse or mission-critical applications – where failure could result in high liability, major revenue loss, or serious operational disruption – can typically command higher margins and face less price-driven competition. The risk-averse nature of customers in these segments creates natural barriers for new market entrants.
- Niche market leadership position
Providers recognized as leaders in a specific technology or application often develop deep customer loyalty which limits competitive pressure and drives a high degree of customer stickiness. These providers are typically well-positioned to achieve outsized margins, premium pricing and have a highly defensible position against larger scale competitors. However, there is the need to gain confidence in headroom for future growth or options to expand the businesses’ addressable market.
- Exposure to growth trends
Providers exposed to end-markets experiencing higher structural growth – such as, semiconductors, data centers, critical power, and life sciences – are better positioned to outperform. In addition, businesses that serve customers with technology or application tailwinds will have stronger growth potential – whether through customers increasing their testing requirements and therefore acquiring more equipment, upgrading to higher functionality / higher price point equipment, or adopting automation and analytics alongside their testing solutions.
How investors can drive value
Within the test & measurement space, there are a variety of transformational strategies to add value to businesses. Some of the most successful include:
- Building an integrated offering
Developing an end-to-end solution across an application, for example, combining sensors, equipment, connectivity, and visualization & analytics, can simultaneously increase a company’s addressable market, strengthen their value proposition, and enable cross-selling, while improving its defensibility. This can be achieved through a combination of bolt-on M&A activity and internal development.
Terra Insights began as a sensor supplier and through multiple strategic acquisitions, combined with internal development, transformed into a full-stack geotechnical monitoring solution provider, integrating multiple sensing capabilities, connectivity, and visualization software. The platform brings together different technologies, different sector expertise, and geographic strengths to provide a more comprehensive value proposition to customers. In doing so, it enables the firm to drive cross-sell and increase customer share of wallet.
- Entering new end-markets
Companies with proven technology in one sector can often expand into adjacent markets. For example, a highly regarded non-destructive testing solution used in semiconductors could be introduced to other markets with similar critical requirements, such as aerospace or automotive.
While building market presence organically can be resource and time-intensive, investors can acquire a complementary product line in the target end-market to help unlock customer relationships and cross-sell potential. This approach also diversifies revenue and reduces sector concentration risk.
- Evolving from component to system provider
High-value component manufacturers can expand their offer to include other components or provide sub-systems. For example, a provider of high-powered lasers could develop a packaged laser measurement solution including optics, power management, and supporting components. This adds value to customers by simplifying procurement, improving system efficiency, and streamlining production. For the business, it expands its revenue and margin opportunity and builds a more embedded relationship with its customers.
- Developing an “-as-a-Service” model
Providers can develop service packages around their equipment including certification, calibration, preventative and reactive maintenance, spares and consumables, or bundle all of these together into a lease / rental model. This expands a provider’s revenue potential for any given sale, generates recurring revenue streams, and allows them to become a high-value life cycle partner as opposed to an equipment supplier.
Major OEMs, such as Keysight Technologies and Fluke, offer maintenance packages that cover software upgrades, hardware replacements, and calibration services, and for certain equipment they utilize partners to offer rental models, with the potential to offer in-house where they have sufficient scale and footprint. This increases the company’s revenue potential with customers while at the same time shifting more towards a recurring revenue model.
CIL continues to monitor trends and activity in the broader test & measurement space. If you would like to discuss key developments or strategic opportunities, please get in touch.
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