Adam S. Palmer | AETHLON CAPITAL, LLC
In 2018, the transportation and logistics (T&L) industry continued to capture the attention of private equity firms (PEs). The third-party logistics (3PL) space was particularly active as acquisitions, both large and small, from The Jordan Company’s acquisition of GlobalTranz Enterprises ($151 million in 2017 net revenue) to Capstone Logistics’ smaller purchase of LoadDelivered ($20 million in 2017 net revenue) were made.
PEs are examining the industry very carefully as they search for new opportunities and targets. In fact, there have been many PEs created specifically to invest in the T&L industry. Firms like ATL Partners, Headhaul Capital Partners, and Greenbriar Equity Group (all based in New York) exclusively acquire T&L companies. These three PEs have a combined 20 T&L companies in their portfolios, of which six (four of them 3PLs) were added in 2018. But, why has there been such a focus on the industry, what exactly are PE firms looking to do, and most importantly, how might industry executives make the most out of this activity?
One of the primary reasons PEs are attracted to 3PLs, with their $186 billion industry, is that 3PLs are so integral to the economy. Commerce would cease to function without their services and PEs want such “mission critical” companies in their portfolio. They’re also encouraged by the T&L industry’s need to continue evolving. The industry, while adapting fast over the years, especially with the growth of e-commerce, still has a myriad of potential technological adjustments to make. According to a recent report by McKinsey, technological advancements like autonomous trucks, advanced analytics, and blockchain have the potential to greatly disrupt the industry.1 PE firms, skilled at managing complex changes, are jumping at the chance to help guide companies through this.
PEs firms are also attracted to the industry because of its fragmented nature, which is conducive to a consolidation strategy, the process by which a PE firm acquires a “platform” company and makes subsequent acquisitions that can be integrated into the platform. Through such consolidation, PEs can then take advantage of various economies of scale, a wider geographic reach, and increased service offerings to stimulate additional growth.
Whether growth is achieved organically through internal efforts like technological innovation or inorganically by acquiring add-on companies, PEs have a number of growth strategies at their disposal.
So when a 3PL is bought by a PE firm, what should the customers and suppliers of that 3PL do to better navigate, and possibly benefit from, the situation? One word: communicate.
So when a 3PL is bought by a PE firm, what should the customers and suppliers of that 3PL do to better navigate, and possibly benefit from, the situation? One word: communicate. It’s important to be proactive, rather than reactive, so reach out to both the PE-backed company and the PE firm that made the acquisition and ask about their strategic plans and vision for the future, ask whether there might be organizational adjustments, and ask what investments will be made in the company. While not all of these questions will be answered, primarily because of competitive reasons, it’s vital for the customers and suppliers of these PE-backed companies to make the effort to create an open, honest dialogue, so that they can learn where changes are expected to occur and adjust their organizations accordingly.
For example, PE-backed companies often examine their suppliers and how each one aligns with their growth plans. Suppliers will be expected to keep up with the company’s increasing demands, and for those who haven’t invested in, or prepared for, additional capacity requirements, this may come as a challenging surprise. Ramped-up demands won’t be done overnight though, so for those that have established a dialogue with the company, preparations can be made well in advance in order to keep that account.
Concurrently with evaluating suppliers, PE-backed companies may implement customer rationalization strategies in which they begin to only focus on their most profitable, largest customers. This often becomes necessary so that they can meet margin and growth targets set by the PE firm. With that said though, Mike Raue, partner at Clarendon Group, a PE firm that focuses exclusively on the T&L space, notes that he and his colleagues “have never observed a materially negative change in a firm’s relationship with customers post-transaction,” because most investors who are seasoned enough are “very careful not to disrupt such very important relationships.” Nevertheless, industry executives should take the time to investigate the PE firms making these acquisitions in order to understand how the PE’s approach each investment and what strategies they tend to implement. This research should offer a clearer sense of the potential impact they will have on a newly acquired company. One of the quickest ways to learn about a PE firm is to focus on their past acquisitions, because this can provide relevant information as to how the PE impacted the company, their customers and their suppliers.
Given that many PEs have experience in a variety of industries, they come across a number of strategies and tools that oftentimes work across industries. Cybersecurity measures lend themselves particularly well to such cross-industry usage. PEs also utilize a number of performance-tracking tools to monitor growth. These tools also allow for the creation of strong, performance-based incentives for leadership teams. Industry executives should be able to adopt many, if not most, of these tactics within their own organizations to help drive improvement and growth.
While some like to attack PEs (everyone knows the name Gordon Gekko), the PE world has never been larger or more powerful. PE firms have doubled their dry powder (funds available to be invested) to more than $1.7 trillion globally since 2012.2 Naturally, with that much money in their coffers, PEs will only ramp up their acquisition pace. It’s almost an eventuality that they’ll impact, directly or indirectly, all facets of the industry, so be ready to reach out and have those conversations when the situation presents itself. There’s no reason to be surprised by a PE-backed company’s adjustments and efforts to grow, nor is there reason to not use the opportunity to learn and grow alongside them.
Adam S. Palmer is Vice President at Aethlon Capital, LLC in Minneapolis, MN. He can be reached at [email protected]
1 Chottani, Aisha, et al. “Distraction or disruption? Autonomous trucks gain ground in US logistics.” McKinsey & Company December, 2018.
2 Bain & Company, Inc. Global Private Equity Report 2018. http://docs.preqin.com/reports/Bain-and-Company-Global-Private-Equity-Report-2018.pdf.