As the first half of an otherwise unremarkable dealmaking season concludes, there is optimism in the investment communities that supply chain investment might pick up as the year goes on.
“2023 was not any kind of banner dealmaking year by any stretch of the imagination,” Dan Luttner, managing partner at management and technology consulting firm MorganFranklin Consulting, tells Supply Chain Management Review. Luttner said S&P estimated there was $2.5 trillion in unallocated investment capital from 2023. “There is a lot of cash on the sidelines and an eagerness to invest. So certain funds with this operational idea are [waiting to invest]. We think the back half of 2024 [will be better].”
S&P said global private equity and venture capital deal value in 2023 declined 34.7% year-over-year to $474.14 billion. The number of deals also fell from 17,549 to 12,016. The number of deals was the fewest since 2019’s 13,726.
Ben Hemani, founding partner of Bison Ventures, points to a number of factors, including low interest rates, that drove VC investment in supply chain and other industries in recent years.
“Double the normal dollars was flowing into the industry,” he says. “And what that resulted in was a large number of companies that raised very large rounds at very high valuations, and then the dollars have moved out of the space.”
Now, a return on investment is the focus. “You … have this digestion problem where all of these very expensive deals got done a couple of years ago, and those companies now need to grow into those valuations in a very different environment,” Hemani adds.
Private equity sees the sun rising
But that is on the venture capital side. On the private equity side, Luttner is seeing opportunity ahead as that “early wave” of investment in trendy tech such as AI slows. MorganFranklin, as with other private equity firms, is interested in creating operational efficiencies.
“The sort of investment and value-creating our firm is in is not sexy, it’s not buzzword-worthy,” Luttner notes, but “operations-focused funds are able to invest and enable that [operational efficiency].”
Luttner has worked in the space for 20 years, and actually works on MorganFranklin’s Plantensive team. Plantensive, which merged with MorganFranklin, through, ironically enough, private equity, focuses on supply chain consulting. Luttner says Plantensive utilizes ASCM’s SCOR model to help companies gain efficiency.
“There has always been a lot of opportunity for individual firms to gain efficiencies within the four walls,” he says. “There are still a lot of companies ‘lower in the curve’ in terms of supply chain planning capabilities.”
The fear of private equity
When founders hear the term private equity, visions of losing control of their businesses are often the first images they see. Luttner says that is not the case.
“There’s a propensity for folks to fear private equity investment,” he says. “If I’m a private enterprise and I’ve built this thing, am I going to lose my soul? Personally, I’ve spent 15 years under four private equity funds and I’ve seen the upside.”
That upside includes the opportunity for growth, funding for strategic investments, vertical integration and a horizontal competitive edge that “that requires an amount of capital that most single firms don’t possess,” Luttner says.
On the flip side, though, is the danger of throwing money at a problem that does not have a well-defined solution. In some cases, money that has been thrown at artificial intelligence-based companies has turned out to be bad investments. The well-publicized failure of Convoy, which had raised over $900 million, offers a cautionary tale.
“The Convoy example could be a downside example because sometimes these [investments] can be a trend investment,” Luttner says. “We are out there assessing vendors and we are also the folks turning those wrenches and validating those [metrics] to ensure those will work.”
Understanding the role of private equity
The decision to take on private equity funding can be a difficult one for founders. As Luttner mentioned, there can be some loss of control if the company is not focused. There can also be upside, but where in the PE cycle the firm is matters as well.
Like all investments, private equity firms want a return on their investment. These cycles often last around seven years. Where in the cycle you are can impact short-term and long-term decision-making.
Private equity does have the ability to leverage other businesses in its portfolio, however. If you are a firm that is exposed to geopolitical risk, a PE firm may have a tech company in its portfolio that can help reduce risk. Or, it may have the funding to invest in or purchase a tech company that can solve the problem.
Luttner, though, says that companies still using spreadsheets and those that can take weeks or months to make decisions are not necessarily attractive to private equity. Companies that offer merger opportunities with complementary firms to reduce costs and improve operational efficiency are also attractive options. Luttner says this is when a consultant comes into play.
“Is that an opportunity to cut out that cost,” he says. “After the deal has been made, our team is one of the firms capable of engaging those new operating partners to design [end-to-end solutions].
“With private equity and outside capital seeing the opportunity for consolidation in the market … there are tremendous opportunities and we are starting to see these,” Luttner adds.