Semiconductors are big business. A vital component of the chips used across modern electronics, semiconductors accounted for around $520 billion in sales last year, according to Deloitte. And some forecasts predict it could be a trillion-dollar industry by the end of the decade.
Yet, although venture capital has long been active in this area and invested more than $50 billion in semiconductor-related businesses over the last five years, according to PitchBook’s recent report on semiconductor scale-ups, private equity has been slower to join the party. But could that be about to change, particularly for investment in Europe and North America?
In October, European PE firm Ardian launched a new strategy dedicated to investing in businesses in the semiconductor value chain within Europe. It is reportedly seeking to raise at least €1 billion to support its Ardian Semiconductor initiative, which is a partnership with Silian Partners, a group of senior executives from the semiconductor industry who will provide sector expertise.
“There are many reasons why we’re feeling upbeat about semiconductors,” said Christophe Duverne, senior managing director and co-founder of Silian Partners. “Our view is that they are at the heart of the digitalization of the economy and the green transition, both of which will be dominant themes in the next decade-plus for the evolution and growth of the global economy.”
There have also been some notable deals in the US. In 2022, in a first-of-its-kind financing, Brookfield agreed to invest up to $15 billion to jointly fund the construction of an Intel semiconductor fabrication facility, or fab, in Arizona.
“There’s a confluence of events that make semiconductors an interesting area for PE investors,” said Scott Jones, a managing director in consultancy Alvarez and Marsal’s private equity performance improvement practice. “You have demand trends that are becoming more predictable and parts of the market that are becoming more investable. And that is being supported by public sector engagement as governments in the US, the EU, the UK are introducing policies and funding to bring manufacturing on-shore or near-shore to create more stable supply chains.”
At a governmental level, semiconductors have been getting a lot more attention in recent years. The COVID-19 pandemic prompted major supply chain challenges for chips, with lead times on deliveries of semiconductors jumping dramatically during 2021.
While these bottlenecks have cleared for most chip categories, these severe squeezes exposed just how concentrated and vulnerable vital supply chains are. With ongoing geopolitical tensions, and the fact that demand for chips is only going to continue to grow, this issue has remained firmly on the political agenda.
In 2022, the Biden Administration signed the CHIPS and Science Act into law, which introduced a $52.7 billion package to support US semiconductor research and development, manufacturing, and workforce development, including $39 billion to incentivize the development of US semiconductor manufacturing capabilities. Similarly, in September, the EU’s European Chips Act came into force, aiming to mobilize around €43 billion (about $46 billion) in investment into innovation and capacity building in EU semiconductor production.
East Asia is reckoned to account for around three-quarters of global semiconductor production. When it comes to the most advanced chips, two firms dominate production: South Korea’s Samsung and the Taiwan Semiconductor Manufacturing Company, with the latter by far accounting for the lion’s share. US company Intel is also currently ramping up efforts to regain market share in leading-edge chips.
Both the US and Europe have already enjoyed some success in attracting investment into new advanced manufacturing facilities. Samsung is building an advanced chips manufacturing facility in Texas and TSMC is due to build two semiconductor fabs in Arizona. TSMC is also part of a joint venture to establish an advanced manufacturing facility in Germany.
Intel, formerly the world’s dominant force in chip manufacturing, is also building four new factories in the US—two in Arizona, and two in Ohio—and one in Germany.
Leading-edge chips are essential for some of the most advanced technologies such as AI, 5G and 6G communications networks, and smart electricity grids. However, establishing manufacturing facilities that can produce these chips are complex, multi-billion-dollar projects. Samsung and TSMC’s plans to establish plants in the US have both been plagued by delays and cost increases.
Demand and pricing for the technology at this end of the market also remain unstable, meaning that it is unlikely to be an area where most PE firms will want to play. While there will be some big-ticket transactions, like the Brookfield–Intel deal, they are likely to be a small minority.
Private equity opportunities
Instead, the main opportunities for PE investment are likely to lie within the wider semiconductor supply chain.
“Semiconductors is an ecosystem industry,” observed Duverne. “There are a host of mid-size companies that serve specific sub-markets or are part of the supply chains of major semiconductor manufacturers. That is really our focus and where we find the most interesting investment cases.”
There are also financing gaps at this level that PE is well-placed to step into. “At the moment we see a lack of coverage for mid-size companies,” suggests Thibault Basquin, member of the executive committee at Ardian, compared to startups, which are well-served by VC and large-cap players who can access the public markets.
This could potentially relate to innovative and disruptive companies that are experimenting with new chip architecture or improving components within chips, for example, that have outgrown venture financing.
At a more mundane level there are also a plethora of materials required to produce chips, with the full supply chain encompassing thousands of different contributors. Chris Lanman, also a managing director in Alvarez and Marsal’s PE performance improvement practice, points out that in a US context “around 70% of materials, chemicals and gases used in semiconductor wafer production are purchased from Asian countries,” potentially creating the opportunity for PE to invest in developing more localized suppliers. Such investment may have a slower growth trajectory, but could provide stable long-term returns. There is also potential for consolidation—a favorite PE play—in certain parts of the market.
Uwe Lambrette, a partner at Deloitte, highlights semiconductor design as one notable example. “There are lots of different semiconductor design houses. Much like we have seen private equity buy smaller cloud providers and consolidate them before selling them on to major industrial players, I can see clear potential for the same to happen within semiconductor design,” Lambrette said. “These are software-focused, asset-light businesses which will not require multi-billions of dollars of investment and could deliver strong returns.”
Some of the most attractive opportunities may also lie in legacy semiconductor technologies, where intensive research and development is no longer required and there is established demand. Sectors such as aerospace and defense are major users of so-called lagging-edge chips in hardware like vehicles.
“For private equity, that stabilization of demand point is crucial,” said Michael Chang, also a managing director in the PE performance improvement team at Alvarez and Marsal. “What was leading edge 10 years ago as part of that drive to deliver smaller, faster, more powerful products, like mobile phones, those technologies are now in toasters, cars, industrial machines, etc. A whole host of products. The [research and development] is done and a plant producing those chips could run for many years.”
Opportunities could also be present in unexpected places. As the US and Europe attempt to scale up their semiconductor industries, they are hitting the very real problem of not having enough skilled labor. It is not just the technicians and engineers directly involved in semiconductor production that need specialist skills, even workers employed to clean semiconductor fabrication facilities require specialist training. A lack of skilled labor has been blamed for delays to the TSMC fab in Arizona becoming operational.
Tackling these massive worker shortages will be crucial if production is to be scaled up outside of Asia, says Alvarez and Marsal’s Jones. “One of the biggest concerns I hear over and over again from executives is that they don’t know how they are going to find enough skilled workers,” he said. “A big opportunity area for private equity could be the training programs to create those skilled workers.”
Yet for all of the potential investment opportunities, semiconductors retain a reputation for being highly specialist. This may need to change before PE is really ready to dive in a big way.
“There is a need for evangelization about this industry and value chain,” said Ardian’s Thibault. “We are not talking about a niche industry here. It’s going to be a trillion-dollar global market. It has also historically been perceived as being highly cyclical because this was a market that was heavily focused on consumer applications, but it has now started to switch towards more stable end markets. The market today is drastically different to where it was 15 years ago.”
Featured image by Mara Potter/ PitchBook News