Capital Goods Valuations – Current Market Disconnect

The climate sector currently has several private companies attempting to raise enormous funding rounds. Most of these companies raised $100-500M as recently as 12 months ago and are back in market already for similar, or larger rounds. Why? At their core, these climate companies are capital goods business with heavy capex requirements… for example: businesses that are building battery factories recycling factories, battery assembly plants, solar facilities, new hydrogen or nuclear related equipment. The ambitions are admirable, but the buzz-saw of the current market is not being kind to the raises and we are seeing “pay for play” provisions return and heavy preference stacks being offered to entice new investors into these deals. I’ve rarely seen that work out well…

I was speaking with the Head of Corporate Development at a Fortune 50 company this past week. His company has exposure and interest in the climate sector and is a likely acquirer for some of these emerging capex-type products. The firm had seen many of the prospective rounds and his commentary really struck a chord:

“These are all capital goods or industrial machinery businesses. The private market is valuing them like technology companies… 5-10x 2028E revenues…. but if these companies commercially succeed, and only a few of them will, we would look to buy them for the standard capital goods valuation levels… 6-8x EBITDA… and the disconnect between the current valuations and the success-dependent fair market value is already too wide”

We spoke for a bit longer, but the general takeaway was clear: just because a product is new & shiny, does not mean the business model or the eventual valuation, will settle in a different range than the underlying business model. Manufacturing and industrial businesses, whether for EV batteries or regular industrial products, settle around that 5-8x EBITDA multiple when achieving scale.