As we’ve now officially closed ’22, I get the luxury of reflecting on the year and sharing my thoughts for ’23. Now, it should be noted that these are my thoughts and they are through a very narrow lens. Our firm doesn’t invest in consumer-facing companies, technology, oil and gas and a whole host of other industries. We like to view ourselves as the meat and potato investors of private equity – specialty manufacturing, business services and value-added distribution. As a result, we don’t care what happens at Meta or Facebook since it’s not the world we invest in. But, in fairness, my views are not broad enough to capture the economy as a whole – so please take them as such.
Doing a year in review and outlook is always a little fun since you have perfect hindsight and are guaranteed to be 100% wrong. I closed last year’s review by saying, “With our expertise and capital, we think that strong businesses can become industry leaders in the post-pandemic landscape.” Unfortunately, as we approach the second anniversary of broad shut-downs in the US, the post-pandemic world still hasn’t emerged. Instead, we have the highly contagious Omicron variant ravaging the world and the US, creating a whole new issue – the tight labor market is even tighter with people out of work sick or unwilling to go back to work. This time the government isn’t shutting down the country; companies just simply don’t have enough workers to operate.
Like most people, it is nice to have 2020 in the rearview mirror. It was a unique year and unlike anything we have ever seen. In January, the outlook looked incredibly strong. Across the board, our Partner Companies forecasted continued growth and we had no reason to doubt them. Then in March, it all started to change rapidly. Within weeks, we had gone from some concern over COVID to closing business activity in several states and borders globally. We quickly entered a new world of facemasks and social distancing and the balance of the year never looked the same.
When talking about 2020, I typically view it in three phases: confusion, liquidity and visibility. In mid-March, there was broad confusion. How dangerous is this disease? Is my business essential? Should I go to the grocery store? Overall, there were more questions than answers. Very few, if any, business leaders had been through this type of environment. In turn, we were all guessing. Fortunately, for our firm, all of our companies were deemed essential. Although they were materially impacted by COVID, they weren’t affected as badly as most.
As we entered April, the focus shifted to liquidity. Were the banks cooperating? Were we eligible for PPP? How long can we survive if business stays at this level for a longer period of time? From April until later May, we worked with our companies closely with a singular focus on liquidity and making sure we could live to fight another day. Our focus wasn’t on growing the top line, it was simply to ensure the survival of our Partner Companies. Then as we rolled into June, we started to see our first signs of a recovery taking hold.
By August, we finally felt we had visibility and a return to a newer form of normalcy. Across our companies, we could see 2-3 months of consistent or improving performance and had greater visibility into the balance of the year. It wasn’t necessarily the performance we had planned on for 2020, but there was comfort that we could now plan and see stability in our companies.
This new stability gave our firm the ability to confidently complete new investments and acquisitions for our Partner Companies. When looking at an investment, we could see the direct impact that occurred over the second quarter of 2020, and by adjusting earnings for this unusual time, we were able to be more aggressive on valuations. As a result, in the latter half of 2020, ORG Opportunity Fund III was able to successfully complete investments in SURESTAFF and Bill Gosling Outsourcing. We also successfully sold the majority of US Med-Equip and completed an add-on acquisition for one of our Partner Companies. Overall, 2020 turned out to be a good year where we added two new Partner Companies to our portfolio roster, successfully sold the majority of one Partner Company and completed two add-on acquisitions (one of which was completed pre-COVID).
As we look to 2021, we are generally positive, but have cautious outlook across our companies. Preliminary orders are in line or ahead of where they were at this time last year. Customer outlook, particularly in our industrial companies, is expecting business to pick up in Q2 ’21. There is still a lot of concern and supply chain disruption due to COVID and international trade delays. For instance, one of our companies has had so much absenteeism due to COVID that our current on-time delivery rate is at 72% (when it consistently averaged above 95% pre-pandemic). We’re also seeing an increase in commodity prices and a shortage of shipping containers. Although this presents additional business challenges, it is a positive sign that the global economy is in recovery mode.
From our perspective, we are excited about 2021 and look forward to finding new Partner Companies to support. We think that it’s a prime opportunity in several industries to complete add-on acquisitions and expand market share while there’s still turmoil in many markets. With our expertise and capital, we think that strong businesses can become industry leaders in the post-pandemic landscape.
Managing Director, Owner Resource Group