When to Invest: Why a Downturn can be the Best Time to Buy-In
2018 marked the first year that more capital was raised through private markets than public. Why the shift? Well, you’ve no doubt heard the cautionary phrase, “Don’t put all your eggs in one basket,” right? Private equity is a portfolio diversifier. More than that, the industry holds a healthy track record for generating historically strong returns when growth is hard to find; during the Great Recession of 2008, for example. But what about now, during the ongoing COVID-19 crisis?
Given the long-term nature of the asset class, private equity investments actually outperform public markets in times of distress and are a strategic option for investing in a downturn.
Two Words: Less Competition
Think of private equity firms as distance runners, not sprinters. We focus on growth over many years, not quarter to quarter like the public markets. This longer time horizon allows us to make calculated strategic moves instead of being afflicted by meeting quarterly results as many public companies are.
Instead of viewing a downturn as a time to throw in the towel, look at it as an opportunity. During a downturn, it’s PE firms who have the upper hand to public companies, who often avoid investments during a bear market. Some public companies activate corporate carve-outs, in which a large corporation with multiple segments decides to divest a business unit it no longer wishes to focus on to outside investors, including private equity firms, who can then introduce them as add-on acquisitions to their portfolio companies. This, logically, increases the investment value to shareholders in the portfolio company.
A downturn in the market presents an excellent opportunity for private equity firms to carefully analyze which companies have potential for high returns coming out of the crisis. Once backed by a knowledgeable private equity firm, companies begin to thrive with financial and advisory resources and business expert connections provided through their PE partner’s network.
How a Private Equity Partner Provides Incredible Value
Examples of private equity firms providing incredible value to businesses during a downturn are just about anywhere. Even a little town called Gilman, Wisconsin, where Gilman Cheese Corporation is a leading producer of premium shelf-stable cheeses. COVID-19 catalyzed a massive surge in demand, particularly for 1 and 2-ounce cheese sticks included in school lunch programs, disaster relief kits, and more.
Here are 5 key implementations that helped them be successful:
Increased capacity of their packaging department by 80% when they added a second shift of production.
Invested in technology to increase production and maximize efficiency when they purchased their sixth Tiromat packaging machine as well as other palletizing and material handling equipment.
Hired 75 new staff members, which increased plant staff by 32%, including a food safety manager, a safety manager, and assistant plant manager to the leadership team.
Leveraged their smaller size to provide value to new and existing customers by smaller quantities, different flavors, and even small-batch trials.
Supported the community by responding to disaster relief efforts; they supplied food banks, meal kit distributors, and school lunch programs in over 30 states.
When Borgman Capital purchased Gilman Cheese Corporation early last year, it’s safe to say we never anticipated an event like COVID-19. However, through open communication, collaboration, and calculated strategy, Gilman Cheese has more than increased their production and customer base - they’ve increased their value as well.
Investing in a Downturn: Stake Your Claim
A downturn is not the time to retreat. Rather, it’s a time to step up and take control of businesses, gain market share, and invest in the future.
Borgman Capital’s investment portfolio includes businesses in essential industries from shelf-stable cheeses to cellular connection services who are stepping up to fulfill the increased demands of a pandemic landscape. We have transparent communication amongst our business partners and advisory council, sharing our collective knowledge and best practices to strengthen our companies and help them flourish through this challenging time.
We are confident that our investments and implementations are contributing to a more resilient supply chain and will help the global community thrive through future economic crises.
For more information on how to invest with Borgman Capital, contact us today.