Is Private Equity Helping or Hurting Trucking?

March 12, 2008

Ten years ago local banks accounted for about 75% of trucking company financing and nonbank investment handled the other 25%. Today, those figures are reversed with private equity firms controlling the lion's share of financing in the trucking industry. Private equity firms offer a valuable alternative for trucking company owners who want to sell, asserts Richard Mikes, a former executive for Ruan Transportation Management Systems, now a mergers and acquisitions consultant. "It's given trucking more liquidity," he said. Mikes says the industry is reaching critical mass, that thousands of small and midsize carriers "have reached a plateau."He asserts that private equity gives owners more options.

The problem is there's a major difference in financial philosophy that could have major repercussions for the trucking industry. "Traditional trucking company ownersare more conservative in use of debt," explained Mikes. They focus on operating ratio, equipment utilization, revenue per mile, etc. Private equity companies, on the other hand, center on broader issues -- cash flow, capital expenditures, return on assets, etc. -- that will generate the greatest annual return -- at least 30%. "This means they tend to seek companies who are growing at a fast rate and they tend to borrow as much debt as possible to increase their return on equity," explained Benjamin Gordon of BG Strategic Advisors.

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