Why have private equity investors recently shown increased interest in investing in North American transportation assets, such as marine terminals and Genesee and Wyoming Railroad?
Private equity firms have been depicted to gain interest and move into the transportation and logistics sector enormously. Internationally, private equity firms have acquired about fifty per-cent of the acquisition and merger deals in the sector of logistics and transportation. The trend in acquisition has been continuing and the firms it closes grown and become a better company. among the companies that have been acquired by equity private include both asset-heavy and asset-light transportation and logistics business across all the transportation modes. In the united states, there has been so much interest in the industry of transportation and logistics, a trend that started in the past five years ago with some companies such as ATL forming to spearhead the process of finding opportunities in sectors that deal in logistics, aerospace and transportation (Bonini, Stefano, and Vincenzo Capizzi, 7).
Traditionally, private equity firms are investment funds that utilize institutional money to buy and finance already established business to make it grow big. Former finance executives and entrepreneurs from the principal of private firms as they have all the experience needed for the target companies or industries. A lot of criteria are used when evaluating potential investments and a majority have the preference of investing in companies that over two million dollars in EBITDA (earnings before interest, tax, depreciation, and amortization) (Hall et al., 122). Private equity industry entails business growth, provision of local job supports, and improving communities across all states. Also, the industry delivers the highest long-term returns to investors and gives or supports a retirement that is secure for firefighters, public servants among them teachers. Private equity is known to invest in those companies that show potential to grow and then they work with them to turnaround the business or expand it. Private equity investors are supported by large institutional of investors that is organized in the form of funds. The fund manager maintains the ownership of the company and works with it for a period of three to seven years after which he or she then seeks to exit the business by selling it to a higher valuation than it was purchased or take it to the business public. Upon exiting the business, the fund manager and investors distribute their profit from the returns or sales. At the end of the investment the private equity investments develop into better jobs, it becomes a stronger company and healthier in the community (Pachakis, 1-26). Therefore, private equity firms do the following:
Invest in firms by making yearly investments of large sums of money in many companies to promote growth and make improvements to them.
Improves the communities by working to grow the business or turnaround and ultimately result in communities’ improvement across America.
Create jobs that support many workers of America in all industrial sectors and strengthen the retirements by providing long-term returns to pension funds and other known investors.
In a company like Genesee and Wyoming Careers, all its subsidiaries form part of the company legacy that has been there for over 100 years and the history of the company indicates that it has set excellence and integrity as its tradition. All the employees working in the company are empowered to uphold the virtue of integrity and excellence that helps in carrying out the core purpose of the company that leads to a realization of its core values. The company has been a great choice for equity investment due to its equality in employment as it does not discriminate when employing staffs based on religion, colour, political affiliation, age, parental status, or any other protected status under the local or federal laws (Bonini, Stefano, and Vincenzo Capizzi, 18).
Genesee and Wyoming have well-organized suppliers and communities it supports and this has great support to its growth and development. The suppliers play an essential role in ensuring that safety and quality of services and materials being procured by the company is realized. The company procures its goods and services at the lowest cost within the desired timeframe, which allows the subsidiary company railroads to successfully perform and enact safety. Its main involvement is logistics, vehicle fleet, operational support, engineering services and material, locomotive fuel, mechanical components, maintenance, and services. The company treats its business partners with the same fairness and responsiveness irrespective of the duration one has stayed in the company. the company has supplier goals that ensure the investor they interact with has a positive experience and regardless of the outcome, they understand that there is often a mutually beneficial relationship in future (Inderst, 30).
To understand better the chances that the trend of acquisition has brought in the industry of logistics and transportation, consideration is put on the reasons why private equity have developed an interest in space. Based on Seth Eliot Wilson, he asserts that private equity firms have become more aware of how integral transportation and logistics, as well as supply chain businesses, are to economies in both domestic and global markets. The supply chain is essential to production and manufacturing companies as nothing can be sold or produced without it. Knowing the supply chain becomes the key realization of private equity firms to create and develop their investments (Pachakis, 11).
It has been asserted that private equity has gotten attracted to the fact that the industry in which they operate has many participants and there is no individual company that holds an outsized market share. Due to fragmentation in the transportation and logistics industries, there has been an urge to consolidate those companies to realize leveraged economies of scale, cut down duplicative operating costs, and increase market share. Also, in the united states, there has been significant waste in supply chain arising from assets underutilization. This has led to a need for scaling technology utilization to efficiently increase assets usage. Inefficient use of assets has been the kind of opportunity that interests private equity companies whose target is utilizing their operational and technological insights to promote profitability and efficiency in potential companies. Also, technology companies that focus on utilizing assets are scaled by private equity firm as their opportunity for acquisition.
Private equity firms are often conversant with economic tailwinds that are assisting to propel the growth industry. The confidence of consumers and spending of a household has remained the strongest driving force in the industry propelling the demand for imports and boosting levels of inventory, which in turn has increased demand for logistic services and transportation. Besides the conditions attracting private equity companies to the industries, it has provided them with chances to grow their acquisitions and shift towards unavoidable exits after selling to a well-strategized acquisition company that is larger. The private equity firms in most cases are encouraged by the multiples EBITDA current market rates. Middle market companies are likely attracted because based on their company size, they have an increase in EBITDA multiples. In the united states, truck transportation has depicted transactions of twenty-five per cent premium in EBITDA multiples. The premiums have been associated with reduced risks involved in the middle market industry. Most buyers have been asserted to value companies that have less risk in comparison to those that have higher risks which are different from private equity firms that see the risks as an opportunity for growing the business. This is because upon successful growth of the acquisition the firm receives higher rewards once they sell. Therefore, it is due to this dynamic that the most affected by merging and acquisition activities in the industry of transportation and logistic lies in the middle market (Hall et al., 124).
The potential effect on customers and suppliers
As stated above, one of the most essential strategies of private equity firm is improving the operations of an acquired company and increasing its profitability. Also, the firm is skilled at introducing procedures and systems that are designed chiefly to drive improvements and efficiency of margins across the business entity. When private equity companies add service offerings and expand into new localities or add new end-markets they are more likely to have better achievements and attain positive result investments. Once the private equity business closes their deals, it is the duty of the suppliers and the consumers of the firms that were acquired to seek the establishment of communication line with the new management early enough to familiarize with possibilities of any changes, disruptions, and opportunities that might arise (Bonini, Stefano, and Vincenzo Capizzi, 21).
In most cases, possibilities take the form of adjustments of price, implementation of new technology, and management restructuring. Clients can decide to be attentive to the process of transition as it pertains customer services. Also, the suppliers and customers are required to remain focused on their contract with the acquired firm and how they are likely to change due to the acquisition process. Sometimes acquisition occurs either through purchasing stock or asset whereby in-stock purchase the contracts form part of a transaction and stays in that place through the transaction process. On the other hand, in purchasing of asset the contracts are typically required to be newly signed and the customers and suppliers are required to be familiarized with the structure of the transaction. Also, it is important to understand if there is control change when contracts are given out as it can amend pricing and terms or cancel the contract (Pachakis, 15).
It is asserted by Mike Raue (partner at Clarendon Group) that private equity business, which exclusively aims at transportation and logistics space does not experience materially negative changes within the relationship of the business with its customers after the transaction. He adds on that majority of the investors understands the principals and tries very much not to break the good relationship that has been set. Mostly both suppliers and consumers benefit from the changes associated with the implementation of the new owners after the company has been acquired. Also, to monitor the allocation of resources and performance of the company, both suppliers and consumers make inquiries as to what tools private equity company has applied in the implementation of the business acquired. However, private equity firms do not put into consideration performance metrics and similar tools when monitoring the company growth as well as progress towards organized goals and plans. Leadership teams are allowed to be created their strong financial incentives and all the tactics used in the organizations should be adopted by suppliers and consumers to assist in spearheading growth and improvement (Inderst, 35).
In a private equity-owned company change and growth are mostly experienced faster than normal pace. It is because in private equity company the ownership period for investment is approximately seven years, which forces the company to work within its constrained timelines. However, the short holding periods by acquisition is likely to result in short-sightedness and uncertainty towards longer-term trends of the industry. When trying to accelerate growth within the company holding period, the investors backing transportation business make add on acquisitions such that the private equity finds extra companies of transportation and logistics that can be merged and added to company’s major platform. Add-ons are usually structured to improve the ability of the company to better serve alike the already existing clients and new customers. Also, the new own company or add-ons in the process of giving the companies that are backed by private equity the capabilities of providing better services, becomes the starting point of them focusing on larger and more impactful clients to realize a long-term growth rate in the company. in cases where the company is a private equity-backed, it examines its suppliers and how every client is aligned with plans for growth such that the suppliers will be required to keep up with the increasing demands of the business (Hall et al.,127).
Also, private equity firms are often prepared for change and in the transportation and logistics industry, there has been a gradual change taking place. Private equity acquisition is linked with disruptions such as resulting in staff turnover, customer rationalization that needs to be muted. Therefore, it is noted that in transportation assets the investment by private equity is a hot deal because currently there has been increased household use of transportation. However, the industry requires a proper investment that makes it to meet its increasing demand while maintaining quality and increasing returns. In this case, private equity firms become the best choices for investing in the industry. During acquisition, the private equity-backed company experiences new ownership, practice, growth, and becomes consolidated, which reduces unnecessary expenditure and increase profit generated. The marine terminals have experienced truck capacity shortages and an escalation on transportation costs, which has resulted in their expansion of logistics services inland. The inland expansion has been asserted to be beneficial to both truckers, owners of the cargo, and save more money as a result more cargos have been secured. Also, there has been an expansion of terminals to ease accessibilities. Therefore, due to the need for investing heavily in this industry to meet the demands of users and avoid potential loses is the reason for private equity investing in the organization. To realize effective and efficient transportation that satisfies the demands of the stakeholders the investment is done by partnering with providers of logistics, railroads, and motor carriers that serves the same station when moving containers through terminals.
Reference
Bonini, Stefano, and Vincenzo Capizzi. “The effects of private equity investors on the governance of companies.” Handbook of Research on Corporate Governance and Entrepreneurship. Edward Elgar Publishing, 2017.
Hall, Peter, and Thomas O’Brien. “Trucking regulation as a critical chain asset in port complexes.” Research in transportation business & management 26 (2018): 122-127.
Inderst, Georg. “Social Infrastructure Finance and Institutional Investors.” Available at SSRN 3556473 (2020).
Pachakis, Dimitrios. “Container Terminals.” Encyclopedia of Maritime and Offshore Engineering (2017): 1-26.