Analysis: ORBCOMM buyout – short odds on a bidding war?
A detour wouldn’t come cheap for either but the appeal is there.
Private equity firms have made a series of notable investments to boost their exposure to the global logistics sector over the past year.
This has entailed deploying capital not only into physical real estate – such as Blackstone’s acquisition of a £473m portfolio of UK warehouses in October, helping the firm to grow its holdings of logistics space to more than 1 billion sq ft globally – but also into the thriving ecosystem of businesses that manage and facilitate global supply chains.
Having invested in Ligentia, a UK-based global supply chain management provider, in February, we see a combination of drivers behind the rising tide of private equity capital flowing into the sector. They include its evident growth potential, the structure of the market and the demand for equity funding to finance capex spending.
Consumer and geopolitical tailwinds
While the migration towards online shopping has been underway for years, the pandemic has dramatically accelerated this trend. Now finding themselves competing in crowded categories for increasingly discerning and expectant buyers, vendors are clamouring for efficient logistics and are increasingly prepared to pay more to secure services.
It is a well-worn cliché that the people who make money during a gold rush are the ones selling the shovels. From controlling warehouse floor space to understanding how to deliver supply chain efficiencies, logistics companies provide the tools by which global e-commerce functions. The result of this is an industry now valued at c.£310bn globally and anticipated to grow at c.5% CAGR until 2025. Private equity has been quick to recognise the return potential implied by these sector fundamentals.
Perhaps counterintuitively to industry outsiders, the rise in protectionism, and the challenges this has posed to global supply chains, is an equally important driver of private equity’s appetite for logistics companies. The increasing complexity of cross-border trade can be seen in ongoing issues around procurement during the pandemic, the trade war between China and the US or the chaos witnessed at Dover in December and the subsequent drop in UK export volumes to continental Europe.
Growing supply chain complexity has benefited logistics companies, with solutions-focused companies which operate seamlessly in different territories finding themselves in high demand. The absence of any easy political solutions to these contentious, multilateral issues should translate into improved performance, rising revenues and a positive long-term outlook for top-tier logistics businesses capable of mitigating trade frictions.
A fragmented, global market
The highly fragmented nature of the logistics market is another key determinant of private equity interest. Unlike heavily consolidated sectors dominated by a few established players, logistics comprises a dynamic mix of traditional organisations with sprawling operations and disruptive, high-growth up-and-comers looking to transform the industry. It is telling that DHL, a market leader in logistics solutions and supply chain management, is estimated to hold a global market share of just c.6%, while Kuehne & Nagel, the largest player in global freight-forwarding, has only a c.10% market share.
For private equity, fragmentation opens up vast possibilities. It provides a ready supply of right-sized target companies for a classic ‘buy-and-build’ strategy, whereby the PE-backed platform rolls up smaller players. Similarly, the intrinsically global nature of the industry opens up an almost exponentially wider range of acquisition and organic growth opportunities. With the right management and level of investment, companies can quickly move from strength to strength.
Technology – getting exposure and financing expenditure
The digitalisation of the logistics industry creates an additional incentive on both sides of a buyout. On the private equity fund side, their underlying investors are expressing a growing preference for tech-enabled companies and future-proof portfolios. Having previously been viewed as an analogue sector, logistics has quickly become highly innovative. It’s estimated that adoption of digital solutions grew at 37% CAGR from 2015 to 2019, with 20% of the market comprising digitally enabled solutions in 2020. We expect this trend to continue and anticipate tech-enabled companies taking an increasingly large market share.
One of the key factors behind our recent investment in Ligentia was the company’s exceptionally strong tech offering, with the company operating two platforms – Ligentix and Customer Hub – which utilise data and analytics to deliver cost-efficient and highly effective solutions for customers.
Logistics companies have proven highly receptive to private equity investment on the same grounds. The significant capex required to upgrade and improve technology offerings ensures that a deep-pocketed institutional shareholder is an appealing partner for a tech-enabled logistics company.
Private equity’s interest in logistics is here to stay. E-commerce and the global rise in protectionism are two powerful undercurrents which are putting a premium on logistics services and making companies highly profitable. Add to this the fragmented nature of the global market, alongside the opportunities and costs associated with technology, and it’s understandable why logistics has rapidly become one of private equity’s favoured sectors.