With all the chaos that’s roiling logistics and supply chain service providers these days, it might come as a surprise to learn that deep-pocketed private investors are keen on the sector.
In fact, it’s been the subject of increasing private equity interest over the past three years, even as the COVID-19 pandemic, war in Ukraine, supply chain congestion and growing trade tensions with China have presented a series of obstacles to getting product to market.
According to the law firm K&L Gates LLP, 53 PE deals in the U.S. supply chain sector last year racked up total value of $20 billion. That was up sharply from a deal value of $7.9 billion in 2020, and $5.1 billion in 2019.
Why do PE investors want to get involved in an industry plagued by multiple disruptions, poor data accessibility and outmoded technology? Simply put, there’s money to be made, especially in consolidation of a fragmented industry, says K&L Gates partner Rick Giovannelli.
What’s more, he says, “It’s a high-demand industry. Many businesses are outsourcing their logistics functions. And we’re still an economy that relies on real physical goods getting places.”
Investors see particular promise in last-mile delivery services, an outgrowth of the explosion in e-commerce shopping (which, in turn, was triggered by the pandemic). It consists of an interesting mix of parcel giants such as UPS and FedEx, and small players relying on gig workers to get product to the customer’s doorstep.
Even with the Amazon.com behemoth dominating the e-commerce landscape, there’s room for smaller, scrappier rivals, Giovannelli says. In fact, many independent service providers are under contract to Amazon and other e-tailers to fill out the growing need for delivery vehicles.
From an investment perspective, last-mile isn’t a short-term play, Giovannelli says. Expenses are high, and the business is still too young and uncertain as to the type of providers who will survive over the long term. Moreover, technology promises to disrupt current service models with innovations such as drones and autonomous vehicles. Yet investors see the sector as ripe with opportunity now, as current and emerging providers scramble for advantage.
In many cases, smaller companies, even those with unproven staying power, actually present a more attractive target for PE investors. “Increasingly,” says Giovannelli, “better deals are at the lower end of the market.” That’s because smaller businesses can be acquired at more attractive valuations then established market leaders. Instead of buying a single large business with mediocre earnings numbers, why not roll up several small entities whose combined assets yield a higher price/earnings multiple? “That’s a very attractive opportunity for a lot of PE investors,” he says.
Supply chain software and technology providers, as opposed to those with trucks and other physical assets, are also an attractive play for the private equity market. “PE investors tend to prefer businesses that are light on capital expenditure,” Giovannelli explains. “They don’t necessarily love to buy a business that owns hundreds of trucks, with environmental issues and a lot of labor.”
That makes asset-light third-party logistics providers, which draw on multiple independent equipment owners to actually handle the freight, especially attractive to investors. “Companies are increasingly turning to these businesses because of the aggregated buying power they have,” Giovannelli says. “They are the true specialists. And private equity loves them because they’re generating revenue from a bunch of people sitting at desks with computers, rather than operating a fleet of trucks.” The result is often a higher rate of cash flow than that of an asset-owning logistics provider, with roughly the same revenues.
In a market that’s ripe for innovation, there are significant opportunities for startups in logistics and supply chain. Over the years, that sector has almost exclusively been a venture-capital play. “In part because the multiples for acquiring the business have been so expensive, a number of founders don’t want to give up control,” Giovannelli says. “So we’re seeing growth equity at a later stage than true startup, beyond the true VC capital play.”
More recently, however, a number of PE shops have set up “growth funds,” which seek not to take control of nascent businesses as do many VCs, but instead provide equity in exchange for a minority stake. And the lines between early seed money and growth equity could continue to blur, as the supply chain and logistics market matures, and technological innovation presents fresh opportunities for investment.
Giovannelli sees tremendous promise of future profits in logistics and supply chain services, especially with passage of the Biden Administration’s infrastructure funding bill. Further opportunities could come with the reshoring of manufacturing from Asia to the U.S., as companies seek to shrink distances and reduce the risk of supply disruption.
“If that happens,” says Giovannelli, “you can absolutely bet that both VC and PE [funds] will be right there alongside, investing in it.”
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