COLONNADE ADVISORS – The current pandemic has sent the automotive industry and other large segments of the economy into a period of turmoil and uncertainty. Economic recovery could be slow, and new car sales are forecast to decline by 26% in 2020. Certain services segments of the automotive industry, such as auto inspection and warranty claims management, however, may be insulated from a broad recession. As the economy gets back to work, the frequency of motor vehicle accidents will rise, and mechanical breakdowns will return to pre-crisis levels.

The auto inspection and warranty claims management sector presents an intriguing opportunity for investors interested in the automotive sector without bearing the weight of the typical macroeconomic trends that impact the new vehicle industry.

The auto inspection and warranty claims management industry has favorable dynamics, including the trend toward outsourcing, the increasing severity and cost of accidents and warranty claims, the expansion of the vehicle service contract market, and the increase in sales of private and certified pre-owned vehicles. Companies in this sector generally have high levels of recurring revenue or multi-year contracts. Technology is playing an important role in transforming what was once a cottage industry of local and regional inspectors into a national opportunity of scale.

The auto inspection and warranty claims management sector presents an intriguing opportunity for investors interested in the automotive sector without bearing the weight of the typical macroeconomic trends that impact the new vehicle industry. Numerous companies of size exist, but few acquisitions have occurred in this sector to date. We expect significant M&A activity over the next several years.

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