Are Private Equity Firms the New Logistics Players? (8/26/24)

A look at how PEFs may be an important new direction for transport logistics

Private equity firms (PEFs) have been part of the logistics landscape for a while, but recent years have seen their activity and influence promise changes that could disrupt the industry on a larger scale. 

The growing power of PEFs in the logistics sphere reflects an upward trend across many industries over the last 15 years. American companies supported by PEFs now outnumber their public equity counterparts according to research by McKinsey (page 2), and PEFs sank $450 billion into deals in 2019.

They also started 2020 with a record amount of cash in hand: $1.5 trillion ready and waiting to flow into transport companies. With a pandemic-stricken world desperate to return to business, PEFs know logistics operations will be some of tomorrow’s most vital and promising investments.

There is little doubt that PEFs are now an influential logistics force, but will this be a blessing or a curse?

In this blog, you will learn:

• How PEFs can help a logistics company

• How PEFs could hurt a logistics company

• How private equity may impact logistics in practice

• How RLG can help your logistics in any scenario

How PEFs can help a logistics company

The first helping hand which PEFs can provide — and one which may prove a lifesaver to struggling logistics companies, during and post-pandemic — is an immediate injection of capital.

An estimated 73% of customers and logistics operations are suffering because of coronavirus, and the total value of the logistics industry itself could drop by over 6% in 2020. Companies connected with a PEF will have a fighting chance to survive thanks to access to ready cash in a time when many businesses are losing it in vast amounts.

PEFs bring an investment mindset to logistics, providing a long-term approach based as much on risk as return. Any company partnered with a PEF benefits from that preemptive perspective. As investors, PEFs also want to see a return on that investment by making logistics operations as efficient and competitive as possible to maximize their own gains.

This desire for returns often creates a more profitable company, which can work out well for all concerned. However, PEFs can also pose problems.

How PEFs could hurt a logistics company

PEFs don’t collaborate with logistics companies for the long-term. They have a departure horizon — typically around five years — at which point they leave and take their gains with them. As majority investors, PEFs usually want a high level of control over how the logistics company is run. Handing over that power could see real improvements, but it could also see changes companies are powerless to stop.

Another drawback is the mezzanine debt scenario, in which a struggling logistics company is bailed out by a PEF loan. While they may not seek company control in those cases, PEFs will be looking for the loan returned with interest at a rate that is typically very high (in the 20% to 30% range).

The pandemic has revealed the true value of logistics as an essential bridge between businesses, the public and the relationships they maintain. PEFs aren’t always concerned with those concepts of value. They may only care about cash value and how they can drive that up, no matter how those decisions impact the reputation or relationships a logistics company has built.

How private equity may impact logistics in practice

One practical example of how PEFs like to change companies is by inserting technology. Tech is a major investment focus for PEFs. This is good for the logistics company in terms of upgraded performance and keeping pace with the competition in an increasingly tech-driven industry.

It also requires the company (assuming the PEF has not assigned its own people) to find the right partner; one which provides tech that makes its operations and benefits clear. Building new and profitable relationships is great, but ultimately, whether those relationships are a choice remains to be seen.

PEFs can be beneficial business partners for some, but it is fair to ask if many struggling logistics companies will even have a choice. An offer of private equity capital at this critical time may be the only chance some companies have of staying afloat, no matter how much it may cost in interest or loss of control.

The differing drives of PEFs and how they view the concept of value could polarize the logistics industry. Will their increasing presence promote better connections between logistics players, or will it become a purely profit-driven field exploited for all it is worth?

This combination of popular choice and possible necessity means PEFs are here to stay as logistics players and a force to be reckoned with in the future of logistics.

How RLG can help your logistics in any scenario

Whichever effect PEFs have on logistics, solid partnerships are now more important than ever. RLG provides our management expertise and money-saving advice without you relinquishing any control of your logistics operation. Our work with LTL and FTL carriers has saved our clients over 34% and 24% respectively, while our transportation management system can quickly put your logistics on technology’s cutting edge.

Get in touch to learn what else we can do to streamline your logistics and why working with us means enjoying the best aspects of a partnership.

Resource Logistics Group provides transportation and logistics advice combined with professional services and state-of-the-art technology. From contract negotiations to easing back office burdens, we are your ally in excellence. Connect with us on our contact page for a free benchmarking analysis.