Forbes - 'The Grinch is coming'

Kevin Dowd

Staff Writer

October 14, 2021

Big Things

Despite global supply-chain backups, revenue and earnings have surged for middle-market consumer companies this summer. Getty Images

1. A looming consumer crunch

For companies large, small, and in between, the American economy continued to boom this summer.

In the U.S. middle-market, private companies recorded median revenue growth of 23.7% during July and August compared to the same period in 2019, while earnings were up 21.2% over the same span, according to a new report published by private lender Golub Capital that’s based on data from the firm’s portfolio. With more than $40 billion in assets under management, Golub is one of the leading providers of the sorts of loans that fuel the modern private equity industry.

When I spoke this week to Lawrence Golub, the firm’s billionaire founder and CEO, he deployed a series of superlatives to describe just how impressive those numbers are, especially against the backdrop of a pandemic: “Extraordinary.” “Robust.” “Fabulous.” In particular, Golub pointed to the consumer sector, where middle-market earnings were up 47.8% this year compared to 2019.

But Golub also sounded a warning to the same consumers who are driving that growth, a warning based on the supply-chain woes gripping the globe that are now leading to round-the-clock operations at the Port of Los Angeles in a bid to clear out an unprecedented logjam of freight: Get your holiday shopping done early.

“Here’s a prediction: The Grinch is coming for Halloween, and he’s going to stay all the way through Christmas,” Golub said. “The supply chain issues that industrial companies are dealing with are migrating over to consumers. If you want to buy a new car, you’ve seen the problem. If you want to buy a new boat, you’ve seen the problem. This Christmas, everybody’s going to see the problem. The stockouts are going to start in November, and they’re going to spread like crazy."

The world economy relies on a complex tapestry of workers, raw materials, factories, planes, trains and ships, all operating with a frankly stunning degree of coordination to move products around the globe in a timely manner. The threads of that tapestry have become tangled during the pandemic. And despite the best efforts of logistics experts to untangle them, disruptions continue, leading to product shortages and long delays across any number of industries.

Heading into the holiday season—one that might be particularly celebratory for many families and friends after pandemic lockdowns made gathering much more difficult in 2020—it’s the consumer sector where the disruptions may be most painful.

Golub put the problem into some helpful pandemic context. Remember the spring of 2020, when no store in America could keep toilet paper or hand sanitizer on their shelves? Golub says there were two different causes for those shortages. There was, in theory, plenty of toilet paper—it was only in short supply because of panic buying. On the other hand, legitimate shortages of product were responsible for hand sanitizer being difficult to find.

He envisions this year’s coming holiday crunch as the worst of both worlds. Snarled supply chains mean product will be scarce. And the emotions of the season could lead to flocks of panicked parents stripping toys and other hot-ticket items from store shelves.

“Popular toys are going to be like hand sanitizer, not like toilet paper,” Golub said. “But the consumer behavior is going to be the same. They’re going to start disappearing from shelves, and people are going to go crazy."

Some experts believe the globe’s supply chains will be all straightened out within the next several months. Golub isn’t so sure. This might not be the last holiday season when last-minute shopping could be a dangerous idea.

“I think there’s a very good chance inventories generally will be caught up by January of 2023, post-Christmas of ‘22,” he said. “I think Christmas of ’22 should be better than Christmas of ’21. But I think prognosticators who think all the supply chain issues are going to get cleaned up by mid-year ’22 are highly optimistic, and it’s not going to happen.

“I think what most people are missing is, we have to catch up not just to the old levels of inventory, but most companies, based on the problems that have occurred over the past year, now have their target inventories much higher than their old targets. So not only do we have to catch up to the old target inventory, we’ve got to go further and catch up to a new, more resilient, more conservative, larger amount of target inventory."

In the big picture, Golub expects the nation’s remarkable pandemic recovery to continue. In one light, the anticipated toy shortages this winter are a good sign: It means there are lots of consumers who are ready to buy.

Political possibilities could tweak the picture. Regardless, Golub is confident. When it comes to assessing overall economic health, the earnings and revenue growth revealed in his firm’s new report are probably stronger indicators than empty shelves.

“There’s such a backlog of spending and consumers, inventory catch-up on the industrial side, that there’s huge momentum for the next few quarters, almost no matter what happens in the United States,” he said. “The infrastructure bill, the reconciliation bill, they’re going to pass or they’re not going to pass. Either way, for the next few quarters, the economy is going to be strong.”

We always have a soft spot around these parts for someone with the initials K.D. Getty Images

2. Geeking out

In the dozen years since its founding, SeatGeek has become an integral part of the sports and entertainment ecosystem—perhaps the most popular of several emerging platforms that use software and eye-catching design to make it easier than ever for fans to buy and sell tickets to events of every kind.

Now, the company is going public. And it's doing so with help from several prominent names from that same sports and entertainment ecosystem.

The ticketing company announced plans today to merge with a blank-check vehicle called RedBall Acquisition Corp. at an enterprise value of $1.35 billion, confirming a Bloomberg report last week that a deal was imminent. RedBall is co-sponsored by Billy Beane, the former Oakland Athletics general manager of "Moneyball" fame, along with executives from RedBird Capital Partners, a private equity firm that frequently invests in the sports sector. In March, RedBird teamed up with LeBron James to acquire a stake in Fenway Sports Group, valuing the owner of the Boston Red Sox and Liverpool F.C. at $7.35 billion.

Kevin Durant, a longtime rival of James, will make a strategic investment in SeatGeek as part of the combination through his Thirty Five Ventures fund. So too will Ryan Smith, the founder of Qualtrics, who bought the Utah Jazz in late 2020 after Qualtrics went public through a $27 billion IPO earlier in the year. Accel doesn't have any NBA connections—not that I know of, at least!—but the Silicon Valley stalwart will also make a new investment in SeatGeek, which it has backed since 2014.

SeatGeek has raised just shy of $300 million in prior venture funding, according to PitchBook, peaking at a $571 million valuation last July. This certainly isn't the first time it's turned to athletes and celebrities for funding: Its long list of prior investors includes Carmelo Anthony, Peyton Manning, Eli Manning, Ashton Kutcher, Shane Battier and Nasir Jones, better known as the rapper Nas.

If that list of luminaries ever gathered together for an investor meeting, it would be an event in itself. And if that hypothetical ever did occur, I'm sure you could turn to SeatGeek to find a ticket.

Other Things

• This week continued an ongoing spate of consolidation among regional banks in the U.S. And investors weren't pleased. Columbia Banking stock fell more than 14% and Umpqua Holdings shares dipped 5% yesterday after the two said they plan to merge in an all-stock deal worth nearly $5 billion, continuing the busiest year for banking M&A in more than a decade. Columbia is based in Tacoma, Wash., while Umpqua is headquartered in Portland. Their merger will create one of the biggest banks on the West Coast, with north of $50 billion in assets and $43 billion in deposits across Washington, Oregon, California, Idaho and Nevada. After a slight recovery in trading today, the two companies have a combined market cap of just over $7 billion.

• Howden Group revealed a deal today to buy fellow U.K.-based insurance brokerage Aston Lark from Goldman Sachs and Bowmark Capital, with Reuters reporting a price of £1.1 billion (about $1.5 billion). The deal is the largest takeover in Howden's 27-year history, creating a combined company with 1.7 million policyholders and more than £6 billion in gross written premiums. The move should set the table for international expansion in the years to come. Bowmark bought Aston Lark in 2015 and promptly embarked on an add-on spree, backing 47 acquisitions in the ensuing four years. Goldman Sachs bought a controlling stake in 2019, with Bowmark retaining a smaller holding.

• Public-relations rivals Sard Verbinnen and Finsbury Glover Hering announced plans today to merge, creating a combined company worth $900 million that will be a major player in the business of advising corporate America on the best ways to communicate with investors, reporters (ahem) and the public at large. I can only imagine the man hours that went into the press release on this one. The combined company will be controlled by WPP, the British advertising and PR giant that currently owns Finsbury, with some 1,000 employees and combined 2020 revenue of $330 million. The firm will adopt a new, yet-to-be-announced name sometime next year, and it is "likely to weigh an initial public offering within a few years," per a Wall Street Journal report.

• Arctos Sports Partners, a recently formed private equity firm with the unique remit of investing exclusively in professional sports franchises, is close to closing its debut fund with $2.1 billion in commitments, according to an Axios report. It would appear that LP demand for the vehicle easily outstripped Arctos' initial ambitions, as the firm originally planned to raise between $1 billion and $1.5 billion. Arctos has already pledged to invest somewhere around $1 billion of that capital, again per Axios, as it begins to build out its portfolio with minority stakes in the Sacramento Kings, Golden State Warriors and others.

• Shares of AvidXchange fell a few percentage points in early trading today after the company conducted an IPO on the Nasdaq. A developer of accounts payable software and other financial tools for businesses, AvidXchange raised $660 million and was valued at $4.9 billion in the listing after selling 26.4 million shares for $25 apiece, at the high end of its expected range. The Charlotte-based company initially planned to offer just 25 million shares. AvidXchange was valued at $2 billion with a round of funding from Sixth Street in early 2020. Its other backers include Mastercard, Peter Thiel and Bain Capital Ventures.

• With a little help from private equity, Indian auto manufacturer Tata Motors is making a move into electric vehicles. Shortly after announcing that TPG and and Abu Dhabi state holding company ADQ would invest $1 billion into the creation of a new EV unit, Tata said it will investor a further $2 billion of its own into the new unit over the next five years, sending shares of the company up more than 20% in trading today in India. TPG's investment in Tata, which might be best known as the owner of Jaguar Land Rover, will come from its TPG Rise Climate fund, which held a first close earlier this summer on $5.4 billion.

• Noted tech investor Francisco Partners has closed its second opportunistic credit fund with $2.2 billion in commitments, continuing a surge of traditional private equity firms into the private credit space. Just last week, one of Francisco Partners' primary rivals, Vista Equity Partners, raised $2.3 billion for a new credit fund of its own. It seems like Francisco Partners has had no problem in finding investments for its nascent credit strategy—nor in finding LPs. The firm closed its initial credit fund on $750 million just 16 months ago, and it easily exceeded an initial fundraising goal of $1.25 billion for this new effort.

• The Carlyle Group is making a bet that live events are ready for a comeback. NEP Group, a portfolio company of Carlyle, announced an agreement this week to acquire Bright Group, a provider of audio/video services, trucking, stages, installation and other live events services for clients in Norway, Sweden and Finland. When the deal closes, NEP will incorporate Bright Group into Creative Technology Northern Europe, an existing NEP subsidiary focused on live events in the region. Carlyle has backed NEP since 2016 and been the company's majority owner since 2018, when it bought out a stake from former co-investor Crestview Partners.

• In its first acquisition ever, Poshmark has purchased Suede One, a startup founded last year that uses software and machine learning to authenticate sneakers and other luxury goods. The combination will add new capabilities to Poshmark's own authentication unit, which examines for free any luxury products sold for $500 or more on the company's secondhand marketplace. Poshmark offers full refunds on any items that don't match their listing description. The company was valued at more than $7 billion after a 142% first-day trading pop when it conducted an IPO in January, but its shares have since declined precipitously, taking Poshmark's market cap south of $2 billion.

• A Texas-based company that provides compliance training services to police departments, fire departments and prisons is changing hands, as GTCR struck a deal to buy Lexipol from fellow private equity firm The Riverside Company. Riverside bought the Lexipol in 2014 and expanded the company's offerings with a series of recent add-ons, buying Praetorian Digital in 2019, Cordico in 2020 and The Rodgers Group earlier this year. Lexipol's offerings aim to educate first responders and other workers about relevant policies and laws in their areas, with twin goals of improving their service to communities and reducing the risk of litigation.

Things To Read

After a pandemic boom in the pet industry that has taken its market cap past $25 billion, Chewy still has expansive ambitions. But taking on veterinarians in the realm of pet medication is easier said than done. [The Wall Street Journal]

How do America's airports alleviate the increasing danger of plane vs. bird collisions? They turn to a 16-year-old, 362-page PDF with the perfect prescription for taxidermied coyotes. [Intelligencer]

The private equity industry has pumped more than $1 trillion into the energy industry since 2010. And despite a growing focus on renewables, the vast majority of that capital has gone into fossil fuels. [The New York Times]

With the help of some Silicon Valley funding, a 37-year-old libertarian wants to build a privatized paradise off the coast of Honduras. The locals have other ideas. [Rest of World]

Private equity firms are passing on more of their administrative costs to allocators. Why? Because they can. [Institutional Investor]

Kevin Dowd

Staff Writer

I am a staff writer at Forbes. I previously wrote for PitchBook, where I created The Weekend Pitch, a weekly newsletter about the private markets. Before that, I covered high school sports in the Pacific Northwest, and I graduated from the University of Washington with a degree in journalism and creative writing. I live in Seattle, where I read a lot of books and play a lot of golf.

Follow me on Twitter.

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Forbes - 'The Grinch is coming'

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