The attraction of Transport & Logistics (T&L) to Private Equity has been displayed in recent years by a number of houses who have made significant investments to capture a broad suite of capabilities, scaling up globally their “core” logistics offerings. The shift in consumer behaviours, rise of eCommerce and current supply chain challenges all point to a sector that is set to play an integral role in businesses of the future.
Our two previous posts have outlined how PE can gain access to the market through a strategy of either adding small bolt-on acquisitions to an initial larger platform purchase or acquiring fewer, larger companies to achieve scale more quickly.
The third strategy we discuss with our clients is the pursuit of dominating in a more focused, specialist area, rather than T&L services in its broadest sense.
STRATEGY #3: Focus on niche service lines
Instead of seeking full scale in “core” logistics offerings, seek to dominate in a focused, specialist area with high entry barriers
The addressable market for T&L services is huge – and growing. However, with so many players in operation, standing out from the crowd and creating a unique differentiating proposition can be challenging.
An alternative approach is to focus investment in one specialist area, providing tailored specific logistics solutions to a customer base with very particular needs. For example, the logistical challenges faced in food transportation versus, say, chemicals will vary significantly. Innovation in last-mile solutions could also be a niche to watch in years to come, as advances in autonomous vehicles, drone deliveries and other similar technology look to disrupt traditional delivery mechanics.
This route to a niche market will mean that the total universe of relevant acquisition targets will be smaller, so this strategy may take time to bear fruit. However, the margins are sometimes more defensible in niche service lines due to the higher barriers for entry.
We have seen one PE house build a portfolio company that is a market leader in niche distribution of non-core goods (not the products that their clients sell, but items required to support sales and marketing activities). These items have unique handling requirements that most mainstream logistics companies are not set up to provide. Another PE house has used bolt-on acquisitions to build a market leader in the niche distribution of specialist automotive spare parts, after which they started acquiring companies that repair and replace these specialist parts. Now they are acquiring specialist logistics technology companies and integrating that into the offering.
The attraction of technology
Technology is an incredibly important strand to the trend of PE investment in T&L – its increasing criticality in powering logistics solutions globally is another driver of investor attraction with regard to future growth potential in a portfolio. Having technology already implemented puts those T&L companies at a strong advantage, as the up-front effort and cost has been applied and expertise developed, which also brings the opportunity for knowledge sharing across a portfolio.
That said, acquiring T&L operators that don’t have that advantage – and then building it in – is an increasingly popular PE strategy to deliver superior returns. The cost of keeping technology at the cutting edge of innovation in this space means that T&L organisations will likely be open to investment approaches from PE, which allows them to develop and keep pace with the competition and fuel expansion as demand soars.
Given the current supply chain challenges and outlook for at least the near term, Transport & Logistics will continue to command attention and future buyer attraction, given the steady returns that they can deliver. But successful outcomes can only be realised with the right multi-step strategy in place.