Good morning, dealmakers. MK Flynn here with today’s Wire.
Nearshoring. We used to say, “Think global, buy local.” Well, these days, maybe it should be, “Think global, supply local.”
For many years, the big trend in the supply chain was to go global. But over the last two years, serious weaknesses in the strategy have been revealed. Now the pendulum is swinging the other way, and the supply chain is becoming more regional. Private equity firms are seizing the opportunities to invest in companies that aim to minimize supply chain disruptions, nearshore parts and services and leverage technology to create more efficient and cost-effective approaches. To learn more about PE supply chain strategies, PE Hub reporter Obey Martin Manayiti spoke with several investors and consultants.
“People are beginning to realize that supply chains can really get whipsawed quickly,” CORE Industrial Partners founder and managing partner John May said. “The whole supply chain is getting compressed, and I think we will continue to see that accelerate the amount of potential reshoring being done. We are seeing the benefits of reshoring or onshoring across our portfolio pretty significantly.”
Lindsay Goldberg, a private equity firm that has a variety of industrial manufacturing companies in its portfolio, is diversifying its sourcing. “You may get 99 of the 100 parts, but you can’t complete the order,” said managing partner Michael Dees.
“Supply chain disruptions have influenced how private equity views add-on acquisitions,” explained Dees. “We may prioritize businesses that provide a supply chain solution by either diversifying or complementing existing channels.”
For more insights, read Obey’s article.
Air cargo. Rising demand for air freight in e-commerce, healthcare and manufacturing prompted AE Industrial Partners portfolio company Alpine Air Express to acquire Suburban Air Freight in a deal announced on Monday. It marked Alpine’s second acquisition since AEI came on board in 2019. To discover more about AEI’s growth strategy for Alpine, Obey caught up with Jon Nemo, a senior partner at AEI and a former investment banker who specialized in aerospace, defense and government services.
Nemo said Alpine’s role can be equated to the last mile of air cargo. In logistics, last mile is the final step in the chain of delivering goods to the consumers. “Our regional services essentially provide that last mile of service so that cargo e-commerce activity can get to the destination faster and more reliably.”
As for the future, Nemo said Alpine and AEI are “exploring opportunities to drive more fuel efficiency and positive climate impact, including electrification, hybrid technology and sustainable aviation fuels. There are electric and hybrid opportunities, and while we don’t think it’s a next-year thing, it is something that we are paying attention to.”
Private debt. Randy Schwimmer, co-head of senior lending at Churchill Asset Management and founder and publisher of The Lead Left, shared with me the results of The Lead Left Private Debt Survey 2022, conducted March 31 and April 5.
“The findings from our “pulse” survey showcased the tailwinds that propelled institutional investors’ interest and appetite in private debt in the past several years – public asset volatility, increased inflation concerns and rising interest rates – have strengthened this year,” Schwimmer said. “The Russia/Ukraine war has accentuated all these effects.
Similarly for the Fed’s rate hike program, which will likely accelerate with steeper consumer price moves seen and expected across a variety of sectors, including food, energy and specialized commodities such as cobalt, lithium and nickel. From an issuer’s perspective, the buoyancy of liquid capital markets we experienced in 2021 has quieted, given the level of uncertainty in how high and how quickly the Fed will now have to act to tame inflation, and how the hikes will impact economic growth. That continues to make the private capital markets an easier path.”
How is increased investor interest in private debt affecting private equity-backed deals?
“Mega-unitranches provided by leading private debt managers will continue to take share from the broadly syndicated loan market and the upper mid-market,” Schwimmer said. “But even with the strong deal flow we’ve seen this year, there’s been an excellent supply/demand dynamic. Deal terms remain well-balanced between being issuer- and investor-friendly. It will also be the case that healthy purchase price multiples will translate to conservative loan-to-value percentages for lenders, in the 40 percent to 50 percent range. So even while headline debt-to-EBITDA leverage can sometimes look high, what you don’t see is the significant equity cushion that’s helping debt providers on the downside.”
How is it affecting PE fundraising?
“It’s a virtuous circle. The more PE dollars raised, the more encouraging deal flow is for private credit managers positioned competitively to take advantage of it. The more private credit dollars, the more efficient the private market will become relative to liquids. It’s important to keep in mind for every new dollar of private credit dry powder, there’s at least five dollars of new PE dry powder. Those who say private debt is a crowded space need to understand it’s all relative.”
Read my interview with Schwimmer here.
BigLaw. DLA Piper is adding 27 attorneys to its private equity practice based in Chicago, the firm announced earlier this morning.
Among them are partners Harris Eisenberg, Alex Plakas, Nathan Wilda and Drew Rosenberry, all of whom hail from Hongiman. Indeed, Crain’s Chicago Business is reporting that all 27 lawyers joining DLA previously worked at Honigman. DLA would not comment on the attorneys’ prior firm, and I haven’t heard back from my email to Hongiman requesting comment.
Here’s what DLA would say about the move:
“The firm developed and is implementing a focused strategic plan, and private equity is a primary part of the plan,” said Joe Alexander, DLA Piper’s US vice chairman, in a statement. “We strongly believe middle-market private equity represents a tremendous opportunity for the firm, and our focus is to continue growing our PE practice in Chicago, other major markets in the US and around the world. This premier group, led by Harris and Alex, exemplifies what we’re looking for: top-notch practitioners who are difference makers in major markets.”
It’s not the biggest recent law firm coup. Paul Hastings recently snatched a team of 43 restructuring attorneys from Stroock & Stroock & Lavan.
That’s all for now. I’ll see you back here tomorrow. “Same bat time. Same bat channel.”