|
|
Each week, we report instances where the money junky hedge funds, private equity groups and the already big companies swallow another piece of the global economy.
Here are some more of what the BIGS have been gobbling up and how the Bigs keep getting bigger and the rich keep getting richer. It should be noted that when interest rates in the U.S. were floating at near zero, merger and acquisition hit an all-time high in 2021.
Now with rates rising, M&A activity is slowing down. And most importantly, a lot of these acquisitions were made with the belief of rising economic growth.
Also, as economies go down and interest rates rise, the debt burden from these M&A’s will grow heavier, crashing many of them into bankruptcy and default on debt.
Yet, even when the economy goes down the Biggest of the Bigs will keep on their buying spree, buying up more companies and expanding their economic reach.
PRIVATE EQUITY SETS ITS SIGHTS ON—CAR WASHES?
As our readers know, private equity’s biggest deals make the headlines: for example, Apollo Global Management paying $7.6 billion for a piece of a telecom company (“Apollo Buys Part of Lumen Technologies,” 10 Aug 2021), Advent International leading a group that bought a cybersecurity giant for $14 billion (“Private Equity Group Buys McAfee,” 21 Nov 2021), or one private equity firm taking over another (“EQT Buys Baring for €6.8 Billion,” 22 Mar 2022.)
However, private equity is no less busy buying small businesses.
Buyout firms own more than 10,000 small businesses as of 30 June, compared to just 2,000 in 2000, according to data service PitchBook.
About 80 percent of those businesses are valued at less than $1 billion and some as little as $25 million, PitchBook said.
As a related example, Carlyle Group, with an estimated $376 billion in assets, has bought more than 130 small apartment buildings in trendy neighborhoods in Brooklyn, New York, snapping up some for as little as $2 million. (See “Carlyle Group Buys Swaths of Brooklyn Apartment Buildings,” 9 Aug 2022.)
However, private equity companies’ latest fascination isn’t with pharma giants or international telecom companies but car washes. Some investors are paying 18 to 20 times earnings for regional chains.
For example, Atlanta company Red Dog Equity has bankrolled something called Mammoth Holdings that has bought more than 100 car washes in the U.S. Southeast and Midwest, with a goal of growing to 500 sites by 2025.
The industry has persuaded investors that car washes are recession-proof, although rising costs for chemicals and labor in a water-scarce world is testing that claim.
Leonard Green & Partners pioneered private equity’s love affair with car washes when it bought the 13-site Mister Car Wash chain in Toronto in 2014 for $250 million.
The sites had high customer volumes, better margins than competitors, but held only a 2-percent market share, the Green firm found.
Under private equity’s leadership, Mister Car Wash introduced innovations such as persuading patrons to buy subscriptions offering unlimited washes for a flat monthly fee.
Subscriptions build loyalty and are a successful marketing tool.
After going public in 2021, the chain now has more than 400 locations across North America and Leonard Green’s investment has grown tenfold in value.
Red Dog hopes to apply the same business model to Mammoth Holdings.
By selling Mammoth’s car wash locations and then renting them back, the company has been able to raise capital for expansion without asking its backers for additional money.
“There is no other operation on a one-acre site that can do $1 million to $2.5 million in sales and pocket half of that,” Jeff Lefko, executive vice-president of Hanley Investment Group, where car washes now account for a major portion of the company’s business.
TRENDPOST: Whether the deal involves international giants or your local car wash, private equity’s goal is the same: buy an undervalued business, guide it toward growth, and sell out for a bundle in the not-too-distant future.
However, the business model has changed.
In the buyout frenzy of the 1980s, buyouts were funded by piling debt on the companies being taken over and insisting on owning a huge portion of the businesses being bought.
That allowed private equity firms to risk little of their own capital and rake in huge profits when the buyout target was sold later.
However, as often as not, the sudden debt load eventually sank the takeover target. Everyone lost.
These days, asset managers are likely to put more of their own cash into a deal and to allow a business’s current owners to keep a larger share. They also take a more active role in guiding the purchased company to growth through better marketing and improvements in operations.
TREND FORECAST: Something else remains the same. Private equity firms are coming to own more and more of the world economy, turning entrepreneurs into employees and centralizing economic influence in fewer and fewer hands.