If your company has been acquired by a private equity firm, the mandate is clear: create a fast path to increased enterprise value and efficiently and effectively fund strategic investments. But the challenges to accomplish this objective are significant given the intensity of the current investment market.
The last few years have seen a surge in private equity buyouts – reaching 5,100 in 2018 (a 10-year high). In 2019, global fund managers are ready to deploy a record US$2.1 trillion in private capital. Competition for deals is also at record levels, and that’s driving up acquisition costs.
All of this makes for high stakes and high pressure in the post-buyout environment and acquired companies are feeling the pressure as they face twin imperatives: (1) to generate more cash, faster, without taking on additional debt, and (2) to respond effectively to the innovation, transformation and changing consumer preferences happening across their industry.
Supply chain finance helps companies navigate these post-buyout challenges and achieve their cash and growth objectives. Here are a few examples:
Pay down debt.
Buoyed by low interest rates, companies have been on a debt binge for the last few years. At the end of 2018, corporate debt reached $9 trillion while cash-to-debt ratios for corporate borrowers were the lowest in over in a decade. Rising interest rates (despite the current stagnation) and global economic uncertainty are putting pressure on freshly acquired companies to deleverage quickly and effectively.
Unlike other debt reduction approaches like workforce cuts or the leaning of operational infrastructure, supply chain finance enables companies to pay down debt quickly and substantially. This, in turn, hastens the journey to positive returns by allowing them to invest in growth. That leads us to my next example…
Fund strategic acquisitions and R&D.
Acquisition is one of the fastest ways to achieve post-buyout growth objectives – including increased market share and profitability. Commercial lending is one way to fund acquisition activity, but it’s not always the best option. In many cases, companies are fully leveraged (see the section above) or don’t have an investment grade credit rating.
Supply chain finance is an attractive alternative. It allows companies to free up working capital previously trapped in their supply chain so they can invest it in strategic growth-oriented initiatives like acquisition, innovation and R&D. Furthermore, it addresses the issues of scale and speed. These initiatives require substantial funding (tens of millions at a minimum and often in the billion-dollar ballpark) and need to be executed quickly.
Meet value creation targets regardless of economic climate.
From the moment of acquisition, value creation is priority number one. Private equity firms set the strategy and targets and they differ based on leadership and the acquired company’s unique situation. But they all have one thing in common: they require financial agility.
That’s a tall order given today’s economic volatility. The Fed raised interest rates four times in 2018 (the ninth since December 2015). While U.S. rates aren’t expected to rise again in the near term, companies are still feeling the impact of those increases as they’ve been relying on lower interest rates for some time. There’s also the issue of domestic trade policy tariffs, weakening economies in Europe and Asia, and geopolitical uncertainty around Brexit. Meanwhile, private equity groups still have a mission that portfolio companies must execute. They must meet or exceed the value creation targets put in place regardless of market volatility and risk.
This is one more reason why companies use supply chain finance. Regardless of business climate, it provides companies a financing alternative that reduces interest expense, generates cash and improves overall financial performance.
Published April 5, 2019