As 2023 enters and the market continues to point to an economic downturn, most investors are preparing for a rocky road and focusing on risk management. However, some alternative investors see periods 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, focusing primarily on direct private investment opportunities. Today, we leverage our decades of experience to maximize the potential of our portfolio companies in a variety of ways, including through financial restructurings, operational turnarounds, and sometimes a combination of both.
In a rapidly changing economic climate like this, there are multiple ways to approach investments, from distressed to complex. There are many questions we ask ourselves when considering what opportunities we actually pursue, including:
- Is this company in an industry with a negative secular trend? We’re long-term owners, so we study broader industry trends. We stay away from industries that are declining or changing rapidly – traditional retail, for example.
- How stable is the customer base? Assessing customer concentration and stability is particularly important to us, and we want to ensure that the customer base remains as intact as possible. If a customer represents 60% of the customer base and that customer moves their business elsewhere, it could negatively impact the investment.
- How much control do we have throughout the process? We need to be determined and come up with a clear strategy and action plan to quickly stabilize the business, especially in an operational turnaround. It is paramount that we have autonomy to act in the best interest of the company.
Improving business strategies and operational capabilities to create platforms for growth
Operational turnarounds can be time and labor intensive, but with patience and expertise, they can deliver tremendous benefits through continued value creation and often pave the way for successful financial restructurings.
EGI took this approach at a moving and moving company that had been negatively impacted by its exposure to the housing market crash prior to the Great Recession of 2008. The company had a sizable portfolio of unsold single family homes that it had acquired as part of its moving services. In addition, previous management had failed to fully integrate the acquisition of assets from two movers and six movers as part of a roll-up strategy.
As the economic environment put significant pressure on the company’s ability to generate cash and the value of unsold single-family homes on its balance sheet declined, the company was forced to restructure its significant debt load through bankruptcy proceedings.
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EGI became one of two major owners after the company exited Chapter 11 in 2008, presenting an opportunity to change management and complete a full operational turnaround. We started the investment with an immediate action plan to stabilize business operations and strengthen the capital structure.
Within two years of the acquisition, EGI significantly reduced the company’s risk by monetizing the housing portfolio, integrating the moving and moving business to eliminate operational redundancies, save costs and refinance the company’s balance sheet. EGI also worked with management to expand the company’s business both domestically and in Europe, allowing the company to increase its market share for the first time in 10 years.
By enforcing operational and balance sheet discipline, the company’s EBITDA rose from breakeven to 17% of its revenue when EGI exited a decade later – a testament to the ripples of value creation and growth delivered by a highly engaged and flexible company can be generated long-term partners.
Complex capital solutions
We often see companies with attractive business models and solid business fundamentals that are struggling with their capital structure due to onerous debt burdens that are regularly exacerbated by industry dynamics and economic cycles. These companies, too, could face acute creative capital needs, especially when other funding sources have withdrawn.
A case study of this approach is EGI’s investment in a family-owned shipping and logistics company primarily serving the US West Coast and Hawaii trade lanes. In response to regulations, the company scrambled to build two ships, which required significant capital. Funding had to be secured within 30 days.
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Under this tight deadline, EGI offered an optimal solution by capitalizing a joint venture solely to build the new container ships. This approach solved the company’s capital structure issues and provided an entry point for EGI to become a partner and investor in the company. Today, EGI continues to support the family and management team with ongoing initiatives.
Is it critical that investors prepare, take a long-term view of a company, and provide companies with the resources and planning they need now, while also thinking ahead of what growth opportunities and partnerships may be on the other side?
A long-term perspective can increase and accelerate turnaround effectiveness
The potential market downturn, even if mild, could be longer and look different than before due to ongoing inflation challenges, rising interest rates and a tight labor market. Many companies may be cash-strapped and anticipate a period of slow or no growth.
In such a macro environment, it is critical that investors prepare, take a long-term view of a company and provide companies with the resources and planning they need now, while also thinking ahead of what growth opportunities and partnerships they can offer as on the other side looks.
Markus Sotir is President of Equity Group Investments (EGI) where he oversees the firm’s investing activities and focuses on optimizing Sam Zell’s network. He applies his 20+ years of CEO and board experience to help portfolio companies improve business strategies and operational capabilities. Additionally, Mark is Vice President of Chai Trust Company, LLC, the corporate trustee for the Zell Family Trusts. He also serves as CEO for Able Freight Services, Ardent Health Services, East Coast Warehouse & Distribution, Lanter Delivery Systems and Paper Transport.
Mark joined EGI in 2006 as Managing Director and has held intermittent internal roles within EGI portfolio companies to accelerate turnarounds and increase effectiveness. Prior to joining EGI, Mark was the chief executive officer of Sunburst Technology Corporation and a member of the company’s board of directors. He also served as President of Budget Group, Inc. (Budget Rent A Car and Ryder Truck Rental) and served on the company’s Board of Directors. Earlier in his career, Mark worked at The Coca-Cola Company in senior brand management and sales positions. Mark holds an MBA from Harvard Business School and a BA from Amherst College.
Equity Group Investments (EGI) is a private investment firm founded by Sam Zell more than 50 years ago. Backed by private capital, we are flexible and opportunistic, focusing primarily on direct private investment opportunities, but we have the in-house expertise to invest across the entire capital structure. As long-term investors, EGI actively works with executives of portfolio companies to execute strategic planning, implement operational efficiencies and scale businesses. We have grown companies in multiple industries into multi-billion dollar companies across economic cycles. And today, we continue to leverage our decades of experience to maximize the potential of our portfolio companies in a variety of ways, including through financial restructurings, operational turnarounds, and sometimes a combination of both.
Disclaimer: For informational purposes only. The content should not be relied upon for making investment decisions and should not be construed as legal, business or financial advice.
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