As we enter 2023 and markets continue to signal an economic slowdown, most investors are preparing for a rocky road ahead and focusing on managing risk. Some alternative investors, however, see times of volatility and uncertainty as opportunities to acquire and invest in companies with significant value creation potential.
At Equity Group Investments (EGI), we are flexible and opportunistic with a primary focus on direct private investment opportunities. Today, we leverage our decades of experience to maximize the potential of our portfolio companies in a number of ways, including financial restructuring, operational turnaround, and sometimes, a combination of the two.
In a rapidly changing economic environment such as this, there are many avenues from investment to complex. When considering which opportunities to actually pursue, we ask ourselves several questions, including:
- Is this company in an industry with negative secular attitudes? We are long-term holders, so we examine broad industry trends. We stay away from industries that are declining or changing rapidly – for example, traditional retail.
- How stable is the customer base? We find it particularly important to evaluate customer concentration and stability, and we want to ensure that the customer base remains as intact as possible. If one customer accounts for 60% of the customer base, and that customer takes their business elsewhere, it can negatively impact investment.
- How much control will we have throughout the process? We must be decisive and come up with a clear strategy and action plan to stabilize the business quickly, especially in operational turnaround. It is paramount that we have the autonomy to act in the best interests of the business.
Improving business strategies and management capabilities to create a growth platform
Operational turnarounds can be time- and labor-intensive, but, with patience and skill, can provide tremendous upside through ongoing value creation, and often pave the way for successful financial restructuring.
EGI took this approach with a moving and relocation company that was negatively impacted by its exposure to the housing market crash that preceded the Great Recession of 2008. The company held a large portfolio of unsold single-family homes acquired as part of it. Transfer Services. Additionally, the previous management failed to fully integrate the asset acquisition of two moving companies and six relocation businesses as part of the rollup strategy.
As the economic environment placed significant pressure on the company’s ability to generate cash and the value of unsold single-family homes on the balance sheet declined, the company was forced to restructure its significant debt burden through the bankruptcy process.
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EGI became one of the two primary owners following the company’s emergence from Chapter 11 in 2008, creating an opportunity to replace management and implement a complete operational turnaround. We have come into the investment with an immediate term action plan to stabilize business operations and enhance capital structure.
Within two years of ownership, EGI significantly divested the business by monetizing the portfolio of homes, consolidating the moving and relocation business to eliminate operating redundancies, cut costs and refinance the company’s balance sheet. EGI also worked with management to expand the company’s business domestically and into Europe, enabling the company to increase its market share for the first time in 10 years.
By implementing discipline around operations and the balance sheet, the company’s EBITDA grew from breakeven to 17% of its revenue when EGI emerged a decade later—showing the value creation and growth waves that can be generated by a highly engaged and flexible long-term. partner
Complex Capital Solutions
We often see companies with attractive business models and solid business fundamentals that have problems with their capital structure due to burdensome debt loads, which are regularly exacerbated by industry dynamics and economic cycles. These companies are also facing an acute need for creative capital, especially if other sources of financing have withdrawn.
A case study of this approach is EGI’s investment in a family-owned shipping and logistics company that primarily serves the US West Coast and Hawaii trade lanes. In response to the regulations, the company attempted to build two ships, which required significant capital. The loan was to be secured within 30 days.
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Under this tight deadline, EGI provided the best solution by capitalizing a joint venture solely for the purpose of building new container ships. This approach resolved the company’s capital structure issues while providing an entry point for EGI to become a partner and investor in the business. Today, EGI continues to support the family and management team with ongoing initiatives.
Is it important that investors prepare, take a long-term view of the business and provide the resources and planning companies need now, while at the same time thinking ahead to what growth opportunities and partnerships might look like on the other side?
A long-term view can enhance and accelerate turnaround effectiveness
A potential looming market downturn, however mild, could last longer and look different than what we’ve seen before as a result of ongoing inflation challenges, rising interest rates and a tight labor market. Many companies are strapped for liquidity and can expect periods of slow or no growth.
In this type of macroeconomic environment, it is critical that investors prepare, take a long-term view of the business and provide companies with the resources and planning they need now, while at the same time thinking ahead about what growth opportunities and partnerships can do. Looks like the other side.
Mark Sotir Sam is President of Equity Group Investments (EGI), where he oversees the firm’s investment activity and focuses on optimizing Zell’s network. He applies his 20+ years of CEO and board experience to help portfolio companies improve business strategies and operating capabilities. Additionally, Mark is Vice President of Chai Trust Company, LLC, the corporate trustee for the Zell Family Trusts. He also serves as Board Chairman for Efficient Freight Services, Passionate Health Services, East Coast Warehouse & Distribution, Lanter Delivery Systems and Paper Transport.
Mark joined EGI as Managing Director in 2006 and has held temporary in-house assignments at EGI portfolio companies to accelerate and enhance turnaround effectiveness. Prior to joining EGI, Mark was Chief Executive Officer of Sunburst Technology Corporation and on the Company’s Board of Directors. He is the Budget Group, Inc. (Budget Rent a Car and Ryder Truck Rental) also served as president and was on the company’s board. Earlier in his career, Mark worked in senior brand management and sales roles at The Coca-Cola Company. Mark holds an MBA from Harvard Business School and a BA from Amherst College.
Equity Group Investments (EGI) is a private investment firm founded 50 years ago by Sam Zell. Backed by private capital, we are flexible and opportunistic with a primary focus on direct private investment opportunities, but we have the in-house expertise to invest in capital structures. As long-term investors, EGI actively partners with portfolio company executives to drive strategic planning, implement operational efficiencies and scale businesses. We have grown companies in numerous industries into multi-billion-dollar businesses throughout the economic cycle. And today, we continue to leverage our decades of experience to maximize the potential of our portfolio companies, including financial restructuring, operational turnaround, and sometimes a combination of the two.
Disclaimer: For information purpose only. The Content should not be relied upon for investment decisions and should not be construed as legal, business or financial advice.