THL’s e-commerce infrastructure duo is “selling picks and shovels to the gold miners”

"There's a long runway of secular growth, because many of the distribution centers are still manual, and you have people physically picking and packing boxes," said Thomas H. Lee's Mike Kaczmarek.

The shortage of labor in the logistics sector has added to disruptions affecting the smooth flow of goods. The need for more efficiency prompted private equity firm Thomas H. Lee Partners to merge its two portfolio companies MHS Global and Fortna, each bringing unique skillsets in automating the supply chain. PE Hub spoke with THL managing partner Mike Kaczmarek to find out more about the merger.

The deal was announced on Monday and according to the terms, THL will remain the majority owner of the combined company, and a wholly owned subsidiary of the Abu Dhabi Investment Authority will acquire a significant minority stake in the combined entity. The merger is expected to create a multibillion-dollar, multinational company providing parcel, warehouse and distribution, and lifecycle services. MHS provides material handling automation technology and systems integration, while Fortna is a provider of software for warehouse and distribution.

“This transaction is exciting because it enables MHS to automate the entirety of the supply chain ecosystem from the package in the warehouse all the way through the sortation facilities,” said Kaczmarek, who leads automation activities for the firm and will sit on the board of the combined entity.

Because of labor shortages, many companies have turned to automation to help ease the pressures on the snarled supply chain. In the US, ports and warehouses have faced acute staffing challenges that slowed the smooth flow of goods, especially during holiday seasons.

Automation “dramatically relieves the pressure in two ways: one is that it helps address the labor shortage, because you just need less labor inside the facilities when they are automated; and two, you get much higher throughput in the facilities,” Kaczmarek said. “So, that higher throughput, again, provides a release valve for the supply chain, because you can push more through the same facility at a higher rate.”

Kaczmarek said that for almost a decade THL has been looking at ways to invest behind the trends of e-commerce growth. The firm is investing out of a $5.6 billion fund but additionally the firm raised $900 million, which he described as PE’s first-ever automation-specific fund. “Those two funds invest side by side each other.”

Long runway

Kaczmarek said that the continuing rise of e-commerce and automation adoption makes the growth prospects looks “extremely attractive.”

“Only about 15 percent of all warehouses globally are automated,” he said. “There’s a long runway of secular growth because many of the distribution centers are still manual, and you have people physically picking and packing boxes. All of that over time will become more automated, which sets this up to be a really interesting opportunity.”

THL also expects growth in both North America and in Europe. “We think this is a $20 billion market opportunity,” he said. “With e-commerce infrastructure, we are selling picks and shovels to the gold miners,” he said.

For more on private equity approaches to investing in the supply chain, click here.