The world of performance automotive seats just got more complicated. On Tuesday, German industry publication Manager Magazin reported that Recaro Automotive GmbH has filed for insolvency. We’re talking about the most famous car seat brand in the world going bust. However, the brand’s recent past has been eventful, and all around the office, we’ve been wondering the same thing — did private equity ruin Recaro?
First, a little background: Just because Recaro Automotive has filed for bankruptcy doesn’t mean Recaro as a brand is facing any threat of going away. Recaro Automotive hasn’t been part of Recaro Holding, the parent company of the Recaro Group, for more than a decade now. It was first sold to Johnson Controls in 2011, then spun off into Adient in 2016 when Johnson Controls decided to separate its automotive line branding from its other areas of business. In 2020, the biggest change happened, when Detroit-based private equity firm — you can’t make this shit up — Raven Acquisitions purchased Recaro Automotive, continuing to license the Recaro name from Recaro Holding.
Here’s how it was reported by Automotive News at the time:
At the time, Adient called Recaro a company that “served a niche market” and was “essentially breakeven.”
Considering how famous the Recaro name is in the world of automotive seating, it hasn’t been a huge fish in the recent past, with the brand reporting revenue of around $150 million in 2019. While certainly not nothing, especially with a relatively lean workforce of around 425 people at the time, revenue doesn’t equal profit, and we don’t have full details on Recaro Automotive’s recent balance sheet considering it’s been a privately held company. However, it should’ve still been a sustainable business, so what happened?
It’s easy to speculate when facts are opaque, but private equity firms generally follow similar methods of operation. They pump a bunch of money into various firms in hopes of a profitable exit. Sometimes they do well, but frequently, brands that can’t be quickly built up get stripped for their intellectual property and riches if they become a losing short-term financial game. It’s possible that part of the problem with Recaro Automotive is that performance automotive seating is a bit of a niche thing. Weirdos like us appreciate it, but most people don’t care if they’re sitting on a Recaro or a Lear or a Sabelt or an Adient, because the branding isn’t massively relevant outside of an audience of car enthusiasts.
At the same time, the end of the near-zero interest rate era has seen serious ramifications for any entity looking to lend or borrow money. Central banking overnight rates are substantially higher now than they were when Raven Acquisitions bought Recaro in January 2020, and it might not have made sense to keep pumping money into the brand.
Needless to say, Recaro Automotive declaring insolvency will take a toll on both its workforce and major car manufacturers. A report from Manager Magazin claims that employees, many of whom are based in Stuttgart, were unaware that the firm would be filing for bankruptcy, and that this event has workers and their union calling for transparency. From the report:
IG Metall was taken by surprise by the insolvency application. “It is unclear what this means for the 215 employees of Recaro Automotive GmbH in Kirchheim,” the union said.
For several years, the workforce has helped to keep the company financially stable by waiving and postponing wages. “We are disappointed and feel let down by management,” said works council chairman Frank Bokowits . “Our colleagues have made great sacrifices to support the company.”
At the same time, major OEMs who offer vehicles with Recaro seats may need to repackage vehicle options depending on if supply can be maintained. For vehicles with other seating options, it could simply be a matter of dropping the optional seats if supply gets interrupted. For vehicles where the only seating options are made by Recaro, it could get difficult and expensive, as new seats often require new crash testing.
Will the Recaro Automotive brand survive bankruptcy? While anything can happen, I reckon there’s a good chance that someone will buy the brand if it comes down to an asset sale. Recaro has a ton of brand equity in the automotive space, and even the aftermarket seating line alone holds consumer appeal to a core audience. However, the only thing we know for certain is that this saga is only beginning. Sit tight, because as events continue to unfold at the most famous car seat brand in the world, we’ll be here to keep you updated.
(Photo credits: Recaro Automotive)
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This needs posted across the internet. Holding Companies or Private Equity firms are just legalized financial mafia by a different name.
—————–
Now he’s got Paulie as a partner.
Any problems, he goes to Paulie.
Trouble with a bill, to Paulie.
Trouble with cops, deliveries, Tommy… he calls Paulie.
But now he has to pay Paulie…every week no matter what
“Business bad? Fuck you, pay me.
Had a fire? Fuck you, pay me
“The place got hit by lightning?
Fuck you, pay me.”
Also, Paulie could do anything.
Like run up bills on the joint’s credit. And why not? Nobody will pay for it anyway.
Take deliveries at the front door and sell it out the back at a discount.
Take a $200 case of booze and sell it for $100. It doesn’t matter. It’s all profit.
Then finally, when there’s nothing left…when you can’t borrow another buck from the bank…you bust the joint out.
You light a match.
And then of course the private equity method of operation is to take several large loans to buy the victim, transfer the loan titles over to the victim for them to pay off, and then force finance reforms to increase gross operating income as high as possible before cutting at least half of it off, putting the victim into negative profit margins while the private equity group takes what should’ve been both the operating budget and the positive profit margins (a certain level of which is required for liquidity) for themselves. It’s essentially scamming an organization into indentured servitude.
Reverse debt takeovers or any type of takeover put forth without the equivalent value in shares or capital immediately on hand should’ve been made illegal a long time ago.
There is nothing the modern business world hates more than a company that is “serving a niche market” and “essentially breakeven”. I mean, sure, its providing people with a product they want and, sure, it’s providing hundreds of people with jobs…
…but where are the shareholders? Where are the private equity bros? How will they survive in a world of companies that make a high quality product people want and pay a reasonable amount for?
The only solution to this disgusting, odious, abhorrent, unnatural situation is to bust out the company by loading it up with debt, using the debt to pay the private equity firm outrageous amounts of money, cutting costs by removing quality, and then declare bankruptcy so no one has to pay the loans back. I mean it’s the only moral thing to do! It’s what jesus would do if HE was a private equity bro!
(Bold is mine).
I think you might have PE confused with venture capital, at least in how the terms are commonly used (in reality, most PE operations have VC arms who handle emerging markets/new ventures, but the terms are not synonymous).
And in practice, having worked for privately owned entities, government, publicly traded entities, and PE-owned, PE is usually seeking to “optimize.” Plenty of public companies (like OpenText, to name one) buy operations whose revenue has essentially plateaued and strip them down, while lots of PE entities buy companies that would otherwise go bankrupt. If a company is sliding into the abyss and hard decisions need to be made, then it’s easy to grief PE (and sometimes they do engage in this behavior), but in practice they’re not any different than publicly traded entities.
In any case, Recaro needed a great deal of capital to turn the company around, and even then there was no indication that such an infusion would actually turn it around.
Also not mentioned anywhere in this article – Recaro was acquired by “Raven Acquisitions,” which has made no other investments. It’s fairly common for investors to pool their money and create a new holding entity for a new acquisition where the PE isn’t really interested in vertical integration, but even in those cases the press releases will usually indicate who the real owner is (like Thoma Bravo or Carlisle or whomever). This particularly group isn’t really PE in the traditional sense – it was money pooled for the explicit purpose of buying Recaro and no connection to the much larger multi-trillion pool of capital that we think of when we say “Private equity.”
$10 says that Recaro will come out of this being owned by Geely or some other Chinese conglomerate
$20 says they’ll be better off belonging to a Chinese conglomerate than a VC fund.