How Private Equity Firms Can Maximize Their Investment in the Supply Chain Sector
It's no secret that supply chains around the country (and the globe) are still experiencing massive disruptions in the wake of the pandemic. It’s true—the global pandemic halted many supply chains and yet, increased e-commerce demand. Not to mention, the lack of employees, truckers, and technology to keep up with consumer demand is causing headaches—late deliveries, inconsistencies, and revenue-loss—for many supply chain organizations.
While a major economic issue, these supply chain disruptions are fertile ground for private equity firms to invest in struggling supply chain organizations, increase their valuation, and turn a profit. According to PitchBook—a data, research, and insights organization—since the pandemic, private equity (PE) deals in the U.S. supply chain sector accounted for:
- $7.9 billion in total deal value in 2020 (37 deals)
- $20 billion in total deal value in 2021 (53 deals)
Mind you, in 2019, the total deal value of private equity supply chain investments amounted to just $5.1 billion. We can only expect this deal value to increase throughout 2023 as Forbes predicts the global economic growth will drop to 2.2% in 2023—down from 3.7% in 2022. Is your firm on the hunt for deals in disrupted supply chains? Here’s how you can maximize your investment in the supply chain sector:
5 Tips to Maximize Your Investment in the Supply Chain
1. Focus on Last-Mile Delivery Services
Last-mile delivery services is an area of growing demand and potential profitability, making it a worthwhile investment for PE firms. The e-commerce market is expanding rapidly (at a CAGR of 14.7% from 2020 to 2027) and consumers are increasingly expecting faster and more convenient delivery options. And since last-mile delivery is the final step in getting a product to the customer, it can be a major determinant of customer satisfaction. Investing in companies that specialize in last-mile delivery, can help your PE firm tap into this growing market and potentially generate significant returns on your investment. Additionally, investing in technology, automation, and analytics can help to optimize delivery routes and improve efficiency, which can further boost profitability.
2. Invest in Smaller Companies to Maximize Profit
Small companies in the supply chain sector often have great potential for growth and profitability. Think about it like this. When smaller companies are usually acquired at a lower valuation than larger, more established companies, why invest in one large organization with poor earnings? Why not invest in a few small companies to generate a higher profit when combining all your assets?
Plus, PE firms typically have the resources and expertise to help these smaller organizations:
- Expand to service more customers at scale
- Improve operations with the right technology and strategies
- Increase revenue and valuation
Additionally, smaller supply chain companies may offer niche products or services that can provide PE firms stepping into new markets with a competitive advantage. And don’t forget, investing in these types of companies can also provide diversification for your private equity firm's portfolio.
Reminder: Even smaller deals require significant due diligence and legal costs. These are often some of the biggest expenses in an acquisition. Ultimately, the capital that some firms have to deploy is so large that they cannot possibly put their assets under management (AUM) to work with a lot of smaller deals. But the real cost is the deal team’s time. Some firms cannot possibly consider smaller deals unless they are part of a roll-up strategy for that particular portfolio company or serve as “bolt on” acquisitions.
All the same, there are smaller companies that are typically (and sometimes mistakenly) being overlooked by PE firms. Yet, if leveraged judiciously, smaller companies can generate much higher returns on investment.
3. Prioritize Operational Efficiency
Supply chains are complex—there’s no doubt about it. Add poor management and inefficient operations to the mix and you’ve got quite the conundrum on your hands. When investing in the supply chain sector, it’s important to begin optimizing your portfolio company’s supply chain by:
- Identifying areas of improvement regarding operational efficiencies
- Strategizing and implementing changes to streamline processes
Streamlining the supply chain operations can result in reduced inventory costs, faster delivery times, and improved relationships with suppliers. Additionally, a more efficient supply chain can lead to increased customer satisfaction and a stronger competitive position in the market. Ultimately, these improvements can lead to a higher return on investment for your private equity firm.
Operations optimization best practices include (but are not limited to):
- Leveraging technology to automate tasks
- Outsourcing non-core functions
- Implementing lean manufacturing principles
4. Improve Supplier Relationships
Building strong relationships with suppliers can help you secure better deals, improve lead times, and reduce the risk of disruptions to the supply chain. Sounds pretty good, huh? It is! With better communication and collaboration within supplier relationships, you can expect to:
- Improve quality and create more efficient processes
- Reduce risks, such as disruptions or quality issues
- Gain a competitive advantage by being provided privileged access to unique products, services, and technologies
- Receive better pricing, resulting in cost savings
- Generate long-term sustainability of the company's supply chain
All of the above can be achieved by regularly communicating with suppliers, providing clear guidelines and expectations, and identifying and addressing any issues that arise.
5. Invest in Logistics and Transportation Technology
Investing in logistics and transportation technology can help you reduce costs, improve delivery times, and increase flexibility in the supply chain of your portfolio companies. For example, leveraging technology, such as GPS tracking on trucks, can help gather data to analyze and optimize truck routes to avoid deadheading and ensure on-time delivery. Recently, we’ve also been seeing an increase in sensors for trucks and other vehicles that provide real-time visibility and updates on shipping and delivery.
Speaking of visibility… only 21% of supply chain leaders believe they have good visibility over their supply chain from end-to-end. Which is why we’re seeing a migration to technology that provides in-depth visibility into the supply chain in 2023. Adopting these technologies early on in your investment is key to maximizing your portfolio company’s growth potential.
With visibility across the entire supply chain, your portfolio company will be better equipped to:
- Meet customer demands
- Reduce shipment delays and downtime
- Assess supply chain assets to optimize for ROI
- Build resilience to future-proof the business against supply chain disruptions
➡️ Fun Fact: LynnCo’s logistics platform, SuiteEdge® digitizes the entire logistics cycle with end-to-end visibility from order to cash and delivers 10-30% savings with 98%+ on-time delivery.
Your goal is to increase the valuation of your portfolio companies in the supply chain sector in a short amount of time—we get it. But without the right tools and support, doing so can be quite the challenge and costly. We can help.
At LynnCo, we provide PE firms with the peace of mind they need to rest assured knowing our end-to-end supply chain solutions will drive valuation. LynnCo’s team of expert supply chain consultants will develop a fully customized program to optimize your portfolio companies’ supply chain, network, inventory, warehouse layout, and more.
So what are you waiting for? Let’s talk about how we can maximize your investment in the supply chain sector.