I saw this post from Value Add about how “Private Equity Keeps Buying Tech Companies, and They’re Not Selling” which stated: “Between Q3 2020 and Q3 2023, PE-backed technology buyouts in North America increased 152% while PE-backed technology exits decreased 81%, signaling that buyout firms are acquiring and holding tech companies faster than they’re exiting them.” And this Wall Street Journal article: Private-Equity Firms Forced to Kick In More Cash to Shore Up Portfolio Companies, showed that PE firms are taking up larger equity positions for exits “U.S. private equity-owned companies refinanced about $51.67B of leveraged loans this year through September, compared with about $16B in all of last year, according to PitchBook.”
On a different topic, I saw that the FAA recently approved an airport modernization project for the Raleigh-Durham International Airport to extend their main runway and facilities over the next few years (estimated at $500M). This got me thinking and researching. It turns out that extending runways, and modernizing airports are clever/proven ways to impact the safety, value, and revenue growth of an existing airport.
My favorite is the Madeira Airport in Portugal, which was notorious for its short runway, and the sharp turn needed on final approach to avoid the coastal hills (the Hong Kong Kai Tak airport, and the San Diego International airports are other examples of high-risk finals. For Madeira, the higher-risk approach excluded larger aircrafts, limited passenger volumes, and blocked carrier routes due to liability and risk. Most leaders would look at this and concede that they were stuck with the circumstance and limited land available. Instead, the Portuguese got creative and built piers over the sea to accommodate a substantial increase in runway length, winning the ‘Outstanding Structure Award’ in 2004 from the International Association for Bridge and Structural Engineering.
Once completed, they were able to accommodate larger aircraft, and increased passenger capacity after opening 4 new gates. Also, the longer runway took risk out landings making the destination more attractive for carriers.
Another reason that airports extend runways is to adjust for the environment. A key issue is the “3 H’s of aircraft performance” Hot, High, and Humid which impacts aircraft performance based on how much oxygen (O2) is in the air (think “thick” vs. “thin” air). The more O2 in the air, the better the lift and performance. When air is Hot, there is less O2 vs. cooler air, when air is High (altitude), you lose O2 vs. sea level. When the air is Humid there is less O2 vs. a dry climate. Airports that are impacted by the “3 H’s” make runways longer to enable faster takeoffs (more lift) and more maneuverability during landings (more time to react).
What does it mean for Private Equity?
The analogue for how 3 H’s takes the oxygen out of the air in aviation is how high interest rates take the oxygen out of PE deals. Proven methods work harder to achieve lift when air is thin or high rates stifle PE deals. While both runway limitations and the 3 H’s are perceived as intractable environmental conditions, there are ways to work around them. We can learn from the Madeira airport example on how they; 1/improved offerings, 2/amplified sales and market positioning, 3/innovated and created new market opportunities, 4/reduced risk.
At Wingspan, we focus on PE held software assets and our experience tell us that there are ways to impact these kind difficult scenarios for PE held software assets. Keys to success in the software world include: 1/moving quickly to establish new ideas, 2/re-visiting the customer experience, 3/examining where existing or new markets should change, and 4/re-visiting offerings. This typically means leveraging the cloud, digital transformation, revised packaging and pricing, partner expansion, and modernization and emerging technologies (generative AI).
At the end of the day, private equity leaders are known for their brilliant adaptability and resourcefulness, and we will continue to watch for who is threading the “high-interest rate environment" needlePE-held in the PE held software world. While the air might be more turbulent and thinner when interest rates rise, it's also an opportunity for PE professionals with software assets to think differently about how to outperform the market.
The Wingspan team is here to help and eager to talk to you.
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