Traveling the Transportation and Logistics Sector

John Yeager, managing director of WhiteHorse Capital, and Corey Mason, principal with WhiteHorse Capital, sit down with Middle Market Growth Conversations to discuss private credit in the transportation and logistics (T&L) industry, including the current market environment, the potholes and risks in the space, and how to stand out among the competition.

This episode is brought to you by WhiteHorse Capital, the direct lending arm of H.I.G. Capital. To learn more about WhiteHorse, visit whitehorse.com. Read a transcript of the podcast below.

Middle Market Growth: Welcome to Middle Market Growth Conversations, a podcast for dealmakers discussing the trends shaping the middle market. I’m your host, Carolyn Vallejo, and this is a production of the Association for Corporate Growth. Today we’re joined by WhiteHorse Capital’s managing director John Yeager and principal Corey Mason and we’re taking a day trip into the transportation and the logistics sector. We’ll be looking at key trends, risks, and financing considerations in the space. John and Corey, welcome to the podcast.

John Yeager: Thank you, Carolyn.

MMG: Let’s get to know you both a little bit first. So there really are so many sectors across the private credit landscape. What made the two of you interested in focusing on the transportation and logistics industry specifically? John, do you want to kick us off there?

JY: Yeah, sure thing. And thanks for having us today. Really excited to talk about this and it’s a sector that is very mundane and always looked at as kind of old economy, but one of the reasons we like it is that it combines the old economy with the new economy. You go from combustible engines to green energy all the way to autonomous driving all within the sector. It’s really an industry that touches every component of manufacturing, whether it’s onshore, offshore or nearshore. It’s one of those industries I’ve always found in my career that I find it makes my job much more interesting when I can find what I’m looking at in my job in real life. And this is a sector where you see it every day. It’s a sector that I’ve been in and around since I started my career. My  first job out of school after accounting was into a boutique investment bank focused on transportation and logistics. And my first investment that we ever made was a mainline drive-in LTL and TL carrier in the southeast. And so it’s really kind of pervaded my investment career over the last 20 years or so.

MMG: And Corey, what about you? What attracted you to this space?

Corey Mason: Yeah, and again, to repeat John’s point, thanks for having us and, and looking forward to this conversation. I think to piggyback off what John said, the transportation, logistics industry is almost a perfect example,  of supply and demand dynamics, which I think allows you to extrapolate on sort of what you’re seeing across the entire economy into sort of a mini economy within the transportation logistics space, which inherently itself is very interesting and allows be smart on a number of different parts of the industry and end markets. And then within T&L, my wife’s family actually owns a transportation business. So whether I wanted to or unbeknown, I’ve always been close to the transportation space. And I thought it was a perfect opportunity when I joined Whitehorse, working closely with John to pair  my personal life and professional life into something that I was very close to and very interested in.

MMG: Now, something we love to ask our guests too is I want to know about your first jobs and maybe whether there was a lesson that you learned there that each of you still carry into your professional lives today. So, Corey, let’s start with you this time. What was your first job?

CM: Sure. My very first job was as a caddy on a golf course. I caddied from when I was about 14 all the way through high school, partially through college.The two things that I learned most from caddying are one, hard work. Sometimes you’d get up there early, early in the morning and, and never get out. And then the second thing is patience. There’s a lot of golfers out there, oftentimes they’re not very good. And patience with them and throughout the entire round, I think has kind of carried into my professional life with being patient on a new deal, new opportunity or working with, individuals across  investment opportunities.

MMG: Patience. That’s a good one. John, what about you? What was your first job?

JY: Well, I don’t think my job was quite as fun as Corey’s. I would love to go back and redo it with Corey’s first job. My first job, I was probably 12 years old, and a friend was selling newspapers on the corner and got me onto it. And so I started selling newspapers every Sunday, basically all day. I would say that the number one thing it taught me was how to work a very long day for not a lot of pay. And then I’d say probably the biggest takeaway that I got from that was really entrepreneurship. I started to build in additional products. I brought flowers with me, and so I would sell flowers along with the newspapers so I could upsell the various customers from whatever, 75 cents they were paying for their paper at the time. But I wouldn’t wish for that job. I’d rather go back and do the caddying.

MMG: It’s still very entrepreneurial of you. That’s incredible. Let’s dive into the topic now, the transportation and logistics industry, it’s a huge space. John, let’s start with you. Can you tell us about how you became industry experts in such a broad space?

JY: It’s  a great question, because like other spaces that require dedicated time and attention, whether it’s TMT or healthcare or other sectors, this is so broad and you can get as deep as you want in a particular sector, or you can be kind of an inch deep and a mile wide. And unfortunately, you really just can’t be an expert in every one of the spaces. And so what it forces us to do is really rely on our kind of pattern recognition. Corey and I have been doing this for quite a long time, close to 20 years now, and so I know where to stay away from. I know what kind of looks good on the surface. I know how to evaluate people very quickly and understand platforms that, that we want to be around or, or niche platforms that we really are looking to find a way to invest in. Another way that we can find levels of expertise that we wouldn’t otherwise have within a particular sub-sector, is really using the power of the platform here. As part of a larger organization, we’re able to leverage the information and portfolios of the rest of our platform, which accounts for close to $70 billion, and well over a hundred portfolio companies. We’re able to use that expertise across the deal teams as a mechanism to get ourselves up to speed faster than some of our competitors might be able to within a particular sector. I’d say, as we’ve kind of invested in this space for a very long time now, WhiteHorse is over 15 years old, and over that 15 years we’ve invested in drayage, we’ve invested in dedicated, we’ve invested in freight-forwarding businesses, and warehousing businesses. So, we’ve invested in a number of the sub-sectors that we find attractive. And so these are kind of areas that we focused on in the past and areas that we believe are repeatable areas for future investment.

MMG: Now, as you just mentioned, the two of you have several decades worth of combined experience here. So you both are in a great position to look back in retrospect and see some industry trends. Let’s take a look back at the last five years. So rewinding back to 2020, which was you know, a pretty notable year, we can say. Corey, how about you kick us off there? What are some of the key trends that you’ve seen across the sector over the last five years?

CM: Sure. So coming out of COVID, we saw increased demand across the entire industry, coupled with industry-wide supply constraints, which inherently just drove increased pricing across industry. And when you combine all of these three factors, it drove outsized and elevated profitability across the space. This dynamic was experienced across every sub-sector, whether it was warehousing, freight forwarding, or asset-heavy type businesses. There was just an industry-wide shortage of supply, which led to this outsized pricing. And not surprisingly, when you saw increased profitability, higher earnings, it led to increased interest from private equity investors between the 2020 and 2022 time period. Over the past two to three years, the transportation industry is in what we call a freight recession. Unlike most industries, the T&L industry operates uniquely in that it can have a freight recession or a cyclical downturn while the broader economy is still performing well. This is driven by unique characteristics where they have supply and demand dynamics are driven by the capacity within the system, whether that’s the number of drivers that are able to ship a product or number of drivers that are working at any given time. So I’d say over the past two to three years, the industry has been in a cyclical downturn which has been a very tough operating environment for a number of these companies. We were on a quarterly portfolio update call a few months ago where the CEO described it as, we’re operating in a 2024 cost structure environment, whereas pricing is back in the 2019 levels.

MMG: Wow. Okay. Well, I want to stay with you for a minute here. Tell us more about what the T&L environment is looking like today and maybe what that means in terms of your expectations for the next year or two.

CM: Sure. I think the important thing to note is that after  the COVID peak and kind of normalization, the industry has really started to stabilize which I think has been great for a number of operating companies, both within our portfolio and the broader investment space. As we mentioned coming out of COVID, there was that increased private equity invest interest in the space. That definitely dried up over the last one to two years. But as you started to see the operating environment stabilize, profitability start to normalize, and earnings, volatility start to normalize, there’s been a reinvigorated interest back in the space. I would say for the last one to two years, we saw very little or less M&A activity in the space, whereas in the past six to nine months, that has reinvigorated and there’s a number of opportunities that we’re currently looking at.

JY: I’d say, Corey, on top of that, what we’ve seen over the course of the last two to three years is a lot of us are looking forward and trying to guess more or less where the future is going to take us in terms of pricing and demand and volume. And that stability that we’ve seen over the course of just the recent few months at least on the volume side has really created a lot of opportunities for companies that have been holding off or waiting to come to market. And you’re starting to see that that volume stability, which we hope will translate into some pricing stability and maybe even upside for the entire sector into late 2025, maybe even 2026.

MMG: John, I want to talk a little bit about the borrower here. So what are the types of companies that typically look for private credit financing and how has that evolved in recent years?

JY: I would say that the industry continues to mature. If you go all the way back to when I started my career, there really wasn’t private credit, at least from a senior perspective, because the banks really dominated the industry and dominated the lending sector. It was private equity, mezz debt, and bank debt. And you didn’t have this kind of alternative source of financing. I’d say that’s evolved with the pullback of the banks during the recession and after the recession as it related to some of the regulatory requirements and other factors that’s also balanced or boosted by the fundraising that’s happened throughout the private credit world. And so you’ve created this incredible supply of private credit over the last 15 to 20 years, which is now being accompanied by the demand for that private credit, which allows for a company to have a little bit more flexibility, has different kind of uses, and other viewpoints on covenants, other viewpoints on cash flow coverage, and allows the company to use that flexibility to invest in itself to create liquidity for shareholders and grow the business via M&A or otherwise. And so, I would say that most of the uses for our funding is typically around either a new transaction where a transaction’s changing hands from one shareholder to another, or in almost equal number of situations, it’s some sort of circumstance for growth capital related to building out or expanding geographic reach or expanding and modifying or modernizing the fleet to take advantage of the new trends associated with equipment production and manufacturing capabilities there.

MMG: Can you tell me a little bit about some of the key attributes of the companies that WhiteHorse Capital has found success in financing?

JY: So, I would say that the most broad-based success and focus of all of WhiteHorse Capital from inception, and this is pervasive throughout our entire organization, is really a focus on the lower end of the market. We believe that we are one of the largest investors really in the world that focus exclusively on this space. And it allows us to bring traditionally more resources to bear to a particular company that we are investing in, regardless of where we are in the capital stack, that allows us to bring the resources of kind of the larger cap market down into these smaller companies and really create value beyond just lending the money. I think that traditional themes of successful investments for us are recurring or repeatable customer interactions, differentiation. We really look for companies that are kind of niches within niches. And so an example of that would be successful investment that we made into a dedicated provider. They have particular lanes that they’re operating within and use it specialized or unique lease model for their equipment within their customers. It’s kind of a niche within a niche. Other areas would be warehousing providers that are kind of focused on specific niches or specific end markets we feel like are a little bit more protected or require a little bit more specialization. I think we typically are looking for areas of where we want to avoid and I think we can talk about that in more depth in a little bit, but we’ll typically avoid things like customer concentration and other key potholes that can create outsized negative returns. And then I think we look for the broader macro focus or the impact of the broader macro trends to a particular business. How do tariffs affect a business? How do offshoring of labor, how does offshoring of particular manufacturing affect a particular business? Or where is the end market for that particular company going? We tend to look beyond the individual company itself to create the success that we’ve had.

MMG: Yeah, I want to talk more about those potholes as you described them, John, but let’s turn to you, Corey. Can you tell me about some of the key risks that White Horse Capital is focused on when evaluating a new opportunity?

CM: Sure. And maybe leveraging off some of what John said, I think one of the key focus areas that we look at is cyclicality. While this isn’t unique or different from just general cyclicality, you know—multiple industries are cyclical. I think the unique thing about the way we address and evaluate cyclicality is that each individual company, individual sub-sector has its own various underlying and different demand characteristics. So when we’re looking at a new opportunity, we’re really trying to hone in on and focus on what specifically drives the business and the underlying characteristics that might have cyclical exposure, whether that’s the customer or the end market, the mode where they are operating geographically. And I think the part within this industry that is unique relative to other end markets is cyclicality means both volume and pricing. So, volume, when we speak about volume, we’re just talking about the underlying demand and end market customer demand for a number of shipments, said simply. But pricing is another very important aspect for cyclicality here, where pricing can be very different depending on the sub-sector, depending on the end market. And one of the things that we really try to focus in on is where that pricing sits relative to cyclical peaks. As we kind of talked about previously, the freight industry went through a freight recession for the past two to three years. And when we’re assessing and determining cyclicality we really try to determine where that pricing is relative to historical lows and historical troughs, which has an outsized impact on profitability because it drops straight to the bottom line.

MMG: In addition to pricing here, Corey, can you tell us about some key structural considerations for T&L financing opportunities and how maybe that differs from other industry verticals within WhiteHorse Capital?

CM: Sure. So, the transportation or T&L industry, is very asset intensive, Or typically is assets intensive. So, we look at every opportunity on what we call an operating cash flow basis or EBITDA, less maintenance CapEx, unlike healthcare or TMT verticals, which are typically asset light and even kind of look at businesses and leverage on a recurring revenue basis or annualized basis. We look at everything on an EBITDA less maintenance CapEx because it’s kind of the true proxy for what leverage and cash flow generation is for these businesses Owning and operating a truck is almost sort of the cost of goods sold for these businesses. And without a good operating fleet these companies are unable service their customer base. So, looking at these business on an EBITDA less maintenance CapEx basis is at least in in WhiteHorse’s perspective, the appropriate way to look at these businesses or structuring of leverage. Another thing I’d mentioned is in that same vein, these businesses do benefit from a high degree of asset value, collateral value. The physical properties and assets do have true value which is another unique way that we evaluate and determine the overall risk profile for these transactions.

JY: Yeah, and Corey, I’d say another structural consideration that we look at and talk about quite often on particular deals is really how close are you to your customer? This is an industry that has various layers of intermediation between the OEM all the way to the end customer. And at each stage there’s a customer and a supplier and a vendor. And so we look at kind of how close are you to your customers, or is everything intermediated? Are you really just competing on price or are you competing on something beyond that, including surface and other quality metrics? And so I think how close are you to your customers is a good structural consideration.

MMG: Now, you know, during this conversation, we’ve mentioned the massive impact from COVID on the T&L space. We’ve mentioned a freight recession. There are a lot of economic factors, macro and micro, influencing this space. So, John, can you tell us maybe a few lessons that you’ve learned from lending in T&L during economic downturns or industry disruptions?

JY: It’s definitely not an industry to dabble in. It’s not an industry for the faint of heart. It’s an industry that has booms and busts and traditionally on a pretty regular basis. You’ll see some of those booms and some of those busts as we’ve talked about through COVID and post that kind of goes back into the last a hundred years or so of the sector. I think it’s a sector that you need to stay current on their various regulations constantly around drivers, how much and how often they can drive, what are their backgrounds. And there’s kind of been a driver shortage for years and years as a result of some of the regulatory changes that have taken place over the last couple of decades. You have to stay current on supply-demand dynamics that can impact all of what Corey mentioned around pricing and volume changes. I would say the biggest lesson that we’ve learned over the last probably 20 years or so, is really that cyclicality is not necessarily driven by your end customer. And so in this particular sector, you could be serving something that might be deemed as non-cyclical. It could be into healthcare; it could be into any variety of food industries or other non-traditionally cyclical businesses. And you’ll find yourself suffering from kind of broader macro cyclicality as you see capacity kind of shift from one sector to another sector. And that creates a compounding effect. When you do see your end customer’s cycle, you could see some macro cyclicality compound that effect. And so, I’d say that’s one of the key areas that we’ve learned to look beyond just the cyclicality of your end customer and look to the kind of broader macro sector and where we are as a whole, as well.

CM: Yeah, I think the only thing I’d add to that is we’ve spoken with a number of experts across the industry, and everyone seems to have their view on when the industry will come out of its cyclical drop, when the recession will truly bottom. I think industry experts and who you’ve been talking to have been saying that trough is going to happen for the past three years and it still hasn’t quite hit that trough. So, it’s anyone’s best guess on when, how this industry is going to work and that there are inherent sort of underlying supply and demand dynamics. And ultimately where that actually plays out is every expert’s best guess. So, you have to truly evaluate your own opinion and not rely on other third parties, which is how we’ve kind of always approached it, but it doesn’t mean we’re always right, but it does at least allow us to take our own third-party outside perspective on all these risks.

MMG: If there’s one thing that I’ve gathered from this conversation today, it’s that the T&L space is complex. There are niches, there are niches within niches. You know, there’s a lot of challenges in this area, and John, as you mentioned, it’s not an industry to dabble in. So that being said, to round out our conversation today, what does the competitive landscape look like within the private credit space? John, let’s start with you.

JY: Yeah, I would say generally speaking across the private credit landscape, it’s incredibly competitive. There are more and more dollars being raised by the day into the sector. New channels are being opened, whether it’s retail and high net worth individuals, recent regulations to open up some of the 401Ks and things of that nature. And so, the magnitude of dollars coming into the sector continue to expand year over year, creating more and more and more supply. And as you mentioned earlier or asked about earlier, the prevalence of companies using private credit direct lending as a source of capital only seems to continue to grow. And so you’ve got both dynamics growing, creating a powerful industry in terms of more capital flowing into it, but also more borrowers coming toward the sector itself. I think we’re heavily dependent upon M&A trends into the near future, really kind of rebounding from where we saw levels, kind of record levels coming out of COVID. And we saw that pull back in 2023 and 2024, I think, as more and more end markets gain comfort on interest rates, where regulatory frameworks are heading, any kind of policy coming down the pike. Those are things that will drive more M&A activity as more stability and less volatility is created. And I think that will drive more demand, which will relieve the competition a little bit. One of the areas that we try to differentiate ourselves on within our various borrowers is not only bringing the resources to bear of a larger cap asset manager but also moving very quickly on the front end. We were able to diligence businesses very fast. One, because we have a partial specialization in these particular kind of niche end markets, but we’re also able to use the rest of the platform and the information sharing across the different professionals, across the thousand professionals that we have access to allow ourselves to move very quickly and react very fast for the companies that we really want to be invested in.

MMG: Corey, anything to add there?

CM: No, I think John nailed it again. Coming out of the peaks of COVID, we saw a lot of, junior capital players enter the market, which I think is indicative of the long-term stability of this industry and the health of the broader market They came in as a source of, I don’t want to call it rescue financing, but these businesses were stressed. They came in and have proved to be successful as the industry rebounded, which is great for the industry, but also just inherently makes it even more competitive. And then, we’re always constantly up against asset-based providers given the fleet value, which we talked about, which makes it interesting, complex and competitive. But as John mentioned, we’re able to leverage the power of the platform and our experience in the space to move quickly on new and interesting opportunities.

MMG: Excellent. All right. Well, that’s John Yeager and Corey Mason with WhiteHorse Capital. Thank you again so much to the both of you for joining our podcast today.

CM: Thanks, Carolyn.

JY: Thanks, Carolyn.

This transcript was prepared by a transcription service. This version may not be in its final form and may be updated.

The Middle Market Growth Conversations podcast is produced by the Association for Corporate Growth. To hear more interviews with middle-market influencers, subscribe to the Middle Market Growth Conversations podcast on Apple Podcasts, Spotify and Soundcloud.