Flow control remains a rising star within industrial distribution investment and mergers and acquisitions (M&A). Investor appetite is accelerating at a time when the industry is benefitting from powerful sector fundamentals, including aging infrastructure in need of repair, expansion, upgrade and modernization. Aged drinking water, stormwater and sewer systems are being taxed by (a) a growing population and expansion of residential development in urban and suburban areas operating systems built 45 to 100+ years ago, (b) expansion of industrial and commercial development to support increased production and reshoring, (c) growing demand and need for infrastructure and technologies to ensure water safety and conservation and (d) an increasing frequency of severe weather events.
Increased industrial production and reshoring, combined with the need for robust process systems that ensure the efficacy of end products while safeguarding employees, assets and the environment, are driving demand for industrial flow control products and technologies. These market drivers are catalysts for solid, long-term growth in an exciting sector to watch.
Market Drivers of Growth
The rollout of the $1.2 trillion Infrastructure Investment and Jobs Act (IIJA) presents a multidecade cycle to repair, upgrade and modernize the nation’s aging water and wastewater infrastructure, while increased production and reshoring is driving strong demand for both municipal and industrial flow control systems, including monitoring and control products.
- Water supply and wastewater management: Recent nationwide reported water, wastewater, and stormwater infrastructure spending needs total $1.2 trillion over the next two decades. An estimated $625 billion is needed for clean drinking water infrastructure according to the Environmental Protection Agency’s (EPA) Drinking Water Infrastructure Needs Survey and Assessment published in 2023, and $630.1 billion for wastewater and stormwater infrastructure according to EPAs 2022 Clean Watersheds Needs Survey.
Large projects are becoming increasingly necessary to upgrade and grow infrastructure. The historical approach of chasing and repairing breaks and leaks no longer works due to a higher number of incidences, taxed service crews and equipment and a need to upgrade systems to increase capacity, ensure safety, reduce maintenance costs and conserve water resources. Historically, government funding, budget cycles and competing priorities created near-term challenges. While those can still exist, funding from the IIJA is supporting municipalities.
On the industrial and commercial side, reshoring activity and higher industrial production is increasing the need for water and wastewater infrastructure to support plants and commercial establishments, as well as pumps, valves, fittings, controls and pipes for production processes within them. In May 2024, the American Society of Civil Engineers (ASCE) released a new economic study highlighting the importance of continued federal infrastructure investments needed to support reshoring and economic growth over the next decade.
- Housing Growth: Another market driver that is important to note is the need for more housing. This is creating demand for new housing development in urban and suburban areas and, as a result, the need for municipal and residential flow control products including pumps, valves, fittings, fire hydrants, metering and control systems and pipe, among others.
- Alternative Energy Sources: The push for cleaner energy has made liquid natural gas (LNG) and hydrogen a focus. The LNG sector is expected to see growth from the transition from traditional fuels to lower carbon solutions. LNG requires highly specialized cryogenic pumps, valves and control systems to handle extreme temperatures. The development of infrastructure to support hydrogen production, storage and distribution is a key driver for flow control products that require specialized valves, pumps and pipes.
Investor Appetite
Numerous signs point to the flow control sector offering sustained demand and growth. The essential role of flow control products and the need for ongoing inspection, repair and replacement remains highly attractive to investors.
The long-term demand drivers, high technical and engineering content and favorable margins of the sector are attracting significant interest as investors seek to generate attractive returns for their stakeholders.
Presidential Election
There is always some uncertainty around elections related to the economy, government funding and spending priorities and, in the upcoming election, tariff policy. Given the aged state of the U.S. infrastructure and strong desire and need to enhance the capacity, safety, reliability and resource conservation of water, wastewater and process infrastructure, funding of projects requiring flow control products is expected to remain a priority.
M&A Remains a Powerful Value Creator
M&A activity has been a focus of large corporations, private equity-backed companies, privately held companies and financial investors with the goal of strategically acquiring new platforms, products and capabilities to enhance product suites, extend geographical and end market coverage and increase scale and efficiencies.
In August 2024, FloWorks International (FloWorks), a private equity-backed distributor of critical flow control products, acquired Assured Automation, a distributor of valve automation and flow meter products. Assured Automation represents the third acquisition completed by FloWorks in the last twelve months.
Flowserve, a provider of flow control products and services for the global infrastructure markets, signed a definitive agreement in August 2024 to acquire MOGAS Industries, a privately held, Houston-based provider of mission-critical severe service valves and associated aftermarket services.
Core & Main has been actively consolidating the fragmented waterworks market, having deployed more than $600 million to close five acquisitions between February and May of 2024, including Dana Kepner Company (Kepner), which it acquired from private equity sponsor Littlejohn & Co. this March, marking its largest acquisition to date.
Future Outlook
The broader industrial distribution market remains attractive to investors and buyers; however, near-term activity is weighted to higher growth end markets such as flow control.
Corporate buyers, private equity firms and lenders have all shown an increased willingness to deploy capital. Given the age of infrastructure in the U.S., continuing growth in populations and industrial production and a need to conserve resources and safety, the long-term prospects of the flow control sector remain positive and will continue to be a bright spot in the broader industrial distribution industry.
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