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PORTFOLIO MANAGEMENT/CRE
Location Economics as an Emerging Driver of Private Equity Decisions As they evaluate where to expand and which operations to relocate, private equity groups are increasingly evaluating location-specific factors. By Steve Brunson, Principal; and Jacob Everett, CEcD; Credit & Incentives Practice, McGuire Sponsel
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or private equity firms focused on value creation, location has historically been an overlooked contributor to business unit performance and earnings. This is changing as leading private equity groups are increasingly evaluating the effects of location on companies targeted for potential acquisition as well as companies within their existing portfolio. Location can significantly affect profits and cash flow, so private equity partners should consider how to incorporate “location economics” to create competitive advantages. While some private equity (PE) groups focus on buying distressed assets and instituting extreme cost-cutting measures, more PE firms are looking to grow companies through capital infusions that enable them to pursue market opportunities. Their goal is to use the acquired company as a starting point for capital injections that will create additional value. While increasing efficien-
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cies may be an objective, the ultimate goal is to increase value through growth. The newly acquired portfolio company is a launch point from which to expand sales and profits. These growth-focused PE firms often follow acquisition with expansion in the form of capital investment and headcount increases. Whether the PE group’s strategy is to own the company in the short or long term, the motivation is the same — grow the operation to increase earnings before interest, taxes, depreciation, and amortization (EBITDA) and enterprise value (EV).
Using Location Economics to Drive Strategy, Decision-Making Location economics can be a significant value driver for businesses. For private equity, this involves understanding the advantages and disadvantages of specific locations on EBITDA, EV, and the sustainability of the business’s operating strategy. Location-specific cost factors are familiar metrics in the real estate and economic development ecosystems, including real estate/ occupancy, labor, utilities, supply chain/distribution, taxes and incentives. With red-hot competition in equity markets and multiples increasing, forward-looking PE groups are increasingly focusing on these areas — using location economics to drive strategy and decisionmaking as they evaluate where to expand and which operations to relocate. “The investment objective of our firm is to identify and capitalize on market distress, disruption, and growth. Many of our portfolio investments are in a period of transition and may require significant additional capital post-acquisition. Increasingly, when evaluating opportunities for growth or improvement, the physical location of the operations has stood out. Access to abundant labor, a desirable location to recruit talent, and a friendly business environment can unlock significant value,” said Jeff Holland, a director with Innovatus for free site information, visit us online at www.areadevelopment.com
8/25/21 4:50 PM
