How private equity firms are disrupting transportation and logistics

Image iStock/metamorworks

Third-party logistics (3PL) companies are attractive investments for private equity firms, enabling new companies in the space to grow faster than ever before. FreightWaves and Redwood Logistics teamed up to host a webinar on how the availability of private equity is shaking up the transportation space.

The webinar, “Company-Building: How Private Equity Firms Are Disrupting and Transforming Transportation and Logistics,” featured Redwood CEO Mark Yeager.

Redwood is active in mergers and acquisitions (M&A) and currently boasts $500 million in annual revenue. Yeager attributed much of the company’s success to the private equity backing of CI Capital Partners.

“There’s nothing new about transformation in our space, and there’s nothing new about mergers and acquisitions in our space,” Yeager said. “When you look at the rail industry, and most of the other industries in the U.S. related to transportation, the consolidation and merger and acquisition activity has been largely beneficial.”

While private equity did not play a role in the consolidation of the rail industry, Yeager noted that it is not a new force in the transportation industry, and it allows more companies to get in on M&A activity than ever before.

“Private equity has been involved in our space for quite some time. It is not by any means a new phenomenon,” he said. “The number of firms that are in the space now has changed. We’ve never seen greater activity going on from a private equity perspective, and that is creating significant impacts on the entire industry, particularly when it comes to asset-light and non-asset companies.”

Not too long ago, the ultimate goal of most companies entering the industry was to go public. This has changed in recent years, but the fact that companies still need access to capital has not.

“Part of the reason companies don’t want to go public is because it is so expensive, on top of being a significant administrative and regulatory burden,” Yeager said. “Another reason is because there’s an alternative now, and that alternative is private equity.”

The availability of private equity is transforming the transportation industry, allowing new or relatively small companies to gain access to the capital needed to invest in people, processes and technology. These companies are no longer constrained in their ability to grow the way they may have been a decade ago.

Yeager said logistics M&A transactions have steadily increased over the last four years, and the average transaction EBITDA multiple is now well ahead of historic norms.

“When [Redwood] started on this path two years ago, I thought $1 billion was a huge stretch goal, but I’m not so sure anymore,” Yeager said. “The growth opportunities are significant.”

Private equity firms are attracted to the transportation industry for several reasons, including the fact that it is an enormous, highly fragmented market. Firms are also attracted to the industry because it is an absolute staple of the economy, according to Yeager.

There are several reasons M&A is attractive to companies and their owners, whether they gained access through private equity backing or not. These include:  

– Accelerate top and bottom line growth

– Build scale/critical mass

– Develop new products and services

– Access new customer and supplier relationships

– Add new talent and expertise

– Diversify away from risk

Mergers and acquisition are a way to produce growth rapidly, but Yeager said that should not be the sole reason companies pursue it. Getting to critical mass in core offerings is a strategic imperative, and it encourages many companies to pursue M&A.

M&A can be a huge driver of efficiency and profitability by helping companies create scale, add new services and increase bargaining strength, among other perks.

“With the advent and convergence of technology, the ability to realize the scale benefits of M&A and get up to critical mass is becoming something that is very achievable,” Yeager said.

Despite the perks, Yeager acknowledged that M&A activity also comes with its own set of challenges.

“Mergers and acquisitions can be disruptive to customer relationships, and they can be disruptive to carrier relationships,” he said. “It is important for customers and carriers to think through how they are going to approach the newly combined entity.”

Customers should have an open dialogue with the new entity, which includes giving honest feedback. Customers have the chance to establish a commitment to continuity and articulate how they want to do business. They should also seriously consider any new capabilities gained.

Carriers should take the time to get to know the leadership of the new entity and understand the new company’s goals and priorities. Carriers often have the opportunity to do more, and they should explore ways to align and integrate.

In any case, there is no doubt that the growing availability of private equity backing will have a measurable impact on M&A activity and the logistics industry as a whole.

New companies entering the space will now be able to accelerate their growth much quicker than was ever possible previously. This competitive landscape will lead to distinct winners and losers. Not all deals work out, and Yeager predicts technology will be the thing that differentiates the deals that work from the deals that flop.

One thing is abundantly clear – existing players will need to adapt in order to stay in the game.