Money attracted to warehousing, 3PL and distribution businesses

by Array

WOODBRIDGE, Ontario—During the recent economic downturn money was in short supply for companies looking for financing. Today, however, that situation appears to have been corrected as supply chain businesses have become attractive partners for financial companies with money to lend.

They’re so attractive, in fact, that two financial services representatives—Mitch Green, a principal at equity investor Clairvest, and James Logan, CIBC  senior director of commercial banking, leveraged finance group—attended the International Warehouse Logistics Association (IWLA) Canadian Council’s 5th Annual Spring Conference to talk to attendees about financial options and why they like to do business with those in the supply chain.

Green says Clairvest really thinks highly of distribution and warehousing companies as places to invest.

“We identify markets where we want to invest, where we’ve done our homework and identified markets with good growth prospects. We think there are great growth prospects for this industry, and in Canada in particular. We’re also here because we recognize that, depending on the business model, it requires some capital. Capital intensity in this industry can be very high, sometimes beyond the means of a family or sometimes beyond the means of a bank, and acquiring outside investment from an equity partner is an option to consider. We also like the fact the IWLA is moving towards encouraging specialization and the fact that you as operators are getting rewarded for doing that. If there’s a theme across all the industries we cover it’s specializing and getting value for it from the customer base.”

Clairvest expects ownership percentages for its investments.

“At times we do preferred share structures, or sometimes common shares. We as equity holders aren’t interested in cash payment. That’s not how our business model works. The trade-off is our money costs more because giving up ownership is always more expensive, but it provides more flexibility because we don’t ask for restricted covenants or things like that. So you have more flexibility day-to-day.”

He added that equity investors look for high returns in the range of 20 to 25 percent over the longer term, preferably five to eight years. Clairvest also requires board representation so it has a hand in the decision-making process.

Logan spoke about the wide range of financing options available from the traditional (including operating lines of credit, term debts and mortgages) to the more innovative such as ABL (asset-based lending), subordinated capital structure debt, or factoring. He also mentioned mezzanine financing as one that should be on the radar of supply chain businesses.

“Mezzanine is typically a second ranking charge, instead of the first ranking charge typically held by your senior debtor. You can find rates between 12 and 20 percent. It tends not to be a coupon rate. It tends to be an all-in rate of return, but it’s pretty flexible. You won’t have to deploy your after tax dollars to amortize the placement. And if something comes up, you’re very likely to have somebody who is very motivated to see their way through to the far side.”

Logan advised those in attendance that information sharing always needs to be the first step in any financial transaction or relationship.

“One of the things I would encourage you to do is take a look and evaluate your relationship with your financial services provider, your existing lender. Are you giving them enough information for them to really understand who you are and what you are doing? Do you share a budget and a forecast with them? Are you bringing them forward?”

“For business that want to grow very quickly, for businesses that want to undertake ambitious acquisition or capital expenditure programs, it is a very worthwhile thing to have a bank that understands you and to have a lender that is capable of lending to your needs.”

To read more coverage from the conference see the May-June issue of MM&D.