Frozen in track: fitness investments wobble in pandemic

Coronavirus forces gym, yoga studios and other fitness centers to shutter shops, halting cash flow.

Private equity firms that back fitness centers are in a tough position as the raging coronavirus continues to spread around the country.

With shuttered locations, fitness-focused companies are having to figure out how to continue paying staff. Sponsors likely will have to kick in more capital to help their companies withstand the downturn.

“When you effectively derail revenue, it just throws all businesses into chaos,” according to a private equity sponsor who invests in the sector.

Sponsors tend to see fitness as “recession-proof,” but the economic slowdown has been so sudden and intense that companies are forced to preserve cash flow at all costs. In a situation where operations are driven by regulatory decisions, it could get problematic for fitness centers that don’t have much cash left to burn.

“The problem is that things are changing day by day,” said Michael O’Koomian, founder and managing director at MOK Capital Advisors, an M&A advisory firm focused on the health industry. “It all depends on how well-capitalized these companies are. The intentions are to take care of your staff.”

Regardless of the cash reserves of big fitness chains such as Roark Capital-backed Orangetheory, TSG-backed Planet Fitness and L Catterton-backed Equinox, well-funded private equity firms will still be forced to inject more liquidity into portfolio companies during this period of downturn, according to a report published this week by Pitchbook.

For example, private equity-backed fitness giant Lifetime Fitness closed indefinitely on March 16. Lifetime was acquired by Leonard Green & Partners and TPG in 2015 for over $4 billion – the largest acquisition in the fitness space over the past five years, Pitchbook said.

Amid these challenges, deal activity may also be hindered. Private equity firms closed 32 deals totaling $498.3 million in the gym/yoga/fitness sector in 2019, up from 29 deals five years ago– however growth may be impacted this year by the outbreak, the data service told PE Hub.

Still, as investors adjust to a new reality, O’Koomian remains bullish on the sector and said the fitness industry will probably benefit more than any other sector coming out of it.

“Coming out of it, more people will want to go out and get healthy,” he said. “Memberships will resume trending upwards better than other sectors.”

On the other hand, virtual reality investor and developer Tipatat Chennavasin, whose firm backs San Francisco-based VR fitness company YUR, said some companies could actually be in a position to benefit in the current environment, where people are minimizing travel and working from home.

“YUR has the highest active users now,” said Chennavasin, co-founder of The Venture Reality Fund. “Up 20 percent over last month.” Chennavasin clarified that these figures also capture the pre-quarantine market, but said he expects the numbers will only continue to climb.

Such digital enterprises have also been supported during this everything-remote period by the increase in broadband access, which increased by almost 20 percent in the past 10 years, Pitchbook said.

That said, investors in at-home fitness business models will reap real rewards only when the companies are able to retain these new users and prove the value in working out indoors even in better times.

The market has already seen a trend in at-home fitness applications and this [outbreak] is accelerating it, said Chennavasin.

Still, until the current emergency passes, it appears deals in the industry are on hold.

O’Koomian said his boutique M&A firm is working on various processes, but for now, they remain on pause.

Update: This report has been updated with additional data from Pitchbook.