More and more transportation and logistics companies are choosing to sell to private equity (PE) groups because of the value-add provided by PE firms and the increasing expense and burden of public markets. That was one of the main messages articulated by the participants in Stifel's "Views on the industry from the perspective of leading PE and VC firms" panel at its Transport and Logistics Conference this morning in Miami Beach.
John Larkin, Managing Director of Investment Banking at Stifel, moderated the discussion, which included John Anderson from Greenbriar Equity Group, Brian Higgins from The Jordan Company, Angel Pu from Warburg Pincus and NGP's Paul Asel.
Larkin began the conversation by introducing the panelists and recalling his own formative years at Alex. Brown & Sons in the mid-1980s.
"I was trying to convince companies to go public," Larkin said. "Raising $15 to $20 million for a third of equity valuation, you would show up on everyone's radar as a big, legitimate player in the space. Today, if you went to a commitment committee at our firm or another, proposing to take a company public that had a $60 million equity valuation, they would throw you out the window. That void has been filled by private equity, because many CEOs would rather work with one highly intelligent and knowledgeable group than 800 investors who are calling every five minutes asking about how business was this morning."
"Being a public company has become burdensome, onerous and expensive," Anderson said. "We never really see that as an alternative [when buying], and we never even think of IPOs on the exit side."
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In the past 50 years, according to Pu, the amount of private capital available for investment has grown from $240 million to $1.5 trillion, changing the competitive landscape. Larkin pointed out that there are between 6,000 and 12,000 private equity firms in the United States, and asked how intensified competition affected expected returns.
The Jordan Company's Higgins said that the kind of consultative work and planning The Jordan Company does for potential acquisitions has been compressed into a narrower time-frame.
"Even before we commit we identify potential add-ons, whether staff needs additional support, et cetera. This has compressed over the last 20 years – you used to buy a company and then start looking for M&A and improvements," Higgins said.
On the subject of winning auctions by paying the highest price, Pu said that years spent with the founders and executive teams before an acquisition gave Warburg Pincus the conviction to justify a higher price.
"One hundred percent of the companies that we've acquired this year [2018], we knew them before they came to market. We followed management for two to three years, ‘fell in love' and we had a vision together with the founder or management team. That's how we can have the conviction to pay the highest price," Pu said.
"We have got to be adding value," Anderson said. "We are typically paying a price that is not going to give our investors a return unless we add a lot of value – we can't be a passive investor."
Anderson also said that companies with both great CEOs and great executive teams can be very expensive to buy, and that Greenbriar is willing to work with ‘visionary' CEOs – ‘visionary' here being a euphemism for difficult or eccentric – and build a supportive team around them.
"We are willing to err on the side of super-smart, driven, visionary CEOs, and we try to provide help," Anderson explained. "We view helping to grow a team as one way we can add value, by trying to insulate and lubricate a difficult superstar."
Higgins also said that the purchase price is not the only price, and he tells founders of companies that if they're able to execute on a plan developed with The Jordan Company, when the exit comes they will be able to "take another bite of the apple."
On the topic of exits, Asel said that public markets are a less likely outcome than 20 or 30 years ago, the most likely sale to is to a strategic investor, but that a sale to a sponsor is increasingly viable.
There was a general consensus that private valuations will likely be more stable compared to public companies, even in the event of an economic downturn, simply because of the large amount of private capital that needs somewhere to go. Pu did acknowledge the possibility of compressed valuations in five or 10 years as a risk, but said that she believes a premium will always be paid for the highest quality companies.
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