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Investors See Rebound One Year Into Pandemic

On the anniversary of coronavirus' arrival in the U.S., some portfolio companies are struggling to keep up with the pace of recovery, while others are laying in wait.

Benjamin Glick
Investors See Rebound One Year Into Pandemic

One year after the arrival of the COVID-19 virus, portfolio companies are no longer in survival mode. Many are struggling to keep up with the pace of recovery, while others are waiting for it to reach them.

For Blackford Capital, a private equity firm based in Grand Rapids, Michigan, the pandemic began as it did for many manufacturing companies and investors across the country.

The firm’s founder and managing director, Martin Stein, says eight of Blackford’s 11 portfolio companies—mainly focused on manufacturing but with holdings in other industries, including hospitality—experienced a precipitous drop in demand and revenue last April.

For some of Blackford’s companies, cash flow declined by as much as 95% in the wake of the state’s lockdown orders, forcing them to make hard decisions, including decreasing output, cutting hours and scaling back their workforce.

“We did a lot of cost-cutting,” Stein says.

Resilience Capital Partners, a private equity firm based in Cleveland that invests in manufacturing and other end markets, also faced difficulties early in the pandemic.

Steve Rosen, a partner at the firm, divides 2020 into segments. “The second and third quarter of the year were just about survival,” he says. “The pandemic wasn’t something that CEOs were trained to manage through.”

But as 2020 wore on, the dire effects of the pandemic on business activity abated—and even reversed—earlier than expected.

For Blackford, the year ended on a high note. “We had one of our best years ever across the entire portfolio in terms of equity and value creation,” Stein says.

Thanks to the responsiveness of managers, along with loans obtained through the Paycheck Protection Program, earnings increased across Blackford’s portfolio—exceeding pre-pandemic levels in some cases, according to Stein.

Now Blackford and Resilience are both facing a problem of a different sort: Their manufacturing companies are struggling to find employees.

We had one of our best years ever across the entire portfolio in terms of equity and value creation.

Martin Stein

Founder and Managing Director, Blackford Capital

“If you’re in Michigan and drive down the highway or any industrial street, it’s like every single company has signs out that say they’re hiring,” Stein says.

For manufacturers, staffing shortages stem from factors that include a surge in new jobs tied to e-commerce—many of which offer better pay than factory work—and absences caused by COVID-19 or family obligations, such as child care, according to a report from The Wall Street Journal.

This is happening as U.S. factories posted their strongest growth in almost four decades, according to the Institute of Supply Management’s purchasing managers’ index (PMI), which jumped to 64.7, an increase of 3.9 percentage points from February—an output increase that’s not happened since 1983.

To attract and keep workers, Stein says some Blackford portfolio companies are looking to raise wages from around $10 per hour to between $12 and $15.

Meanwhile, Resilience is investing heavily in automation to fill the gap in employment. “We got a good taste of what it’s like to not have a steady supply of people for all tasks and we really have to start thinking about what else is out there and where we can automate certain things,” Rosen says.

Resilience plans to deploy robotics in manufacturing processes and optical systems for quality control in some of its companies’ facilities.

MIQ, one of the firm’s companies based in Cincinnati, focuses on building customized automation equipment for other manufacturers. “We’re a manufacturer, not just a beneficiary of automation,” Rosen says.

Readying for a Boom

While manufacturers are off to the races, other industry segments are still waiting to recover.

Few businesses were hit harder by the COVID-19 pandemic than restaurants. According to a year-end report from the National Restaurant Association, the COVID-19 pandemic caused restaurant sales volume to drop $240 billion. More than 110,000 food and drink sellers closed temporarily or for good, and 8 million workers were furloughed or let go in 2020.

According to Toby Warticovschi, a partner at St. Louis-based PE firm Millstone Capital Advisors, the overarching theme of its portfolio companies last year was adaptability.

Millstone is heavily invested in the food industry with its Lion’s Choice and Native Foods chain of restaurants. Both brands continue to face supply chain and labor challenges, Warticovschi says.

“These challenges are likely to be with us for some time,” he says.

But the firm’s management teams continue to adapt to evolving market conditions. For example, the companies adopted more efficient labor models and contactless payment systems.

As a result, Millstone’s businesses are ready for the influx of patrons when the pandemic ends, according to Warticovschi.

“I believe the restaurant industry should see a boom over the next 12 months,” he says. “After all, eating is a social activity, and I believe a meal is always better when shared around a table with family and friends.”

I believe the restaurant industry should see a boom over the next 12 months.

Toby Warticovschi

Partner, Millstone Capital Advisors

Hospitality has likewise been affected negatively by the pandemic, as a result of travel restrictions and visitors’ anxiety over the spread of the virus. The American Hotel and Lodging Association projects half of U.S. hotel rooms could remain empty in 2021.

Vertically Integrated Projects, a portfolio company of Blackford that supplies hotels and resorts, was acutely impacted as hotel occupancy dwindled and tourism dried up.

But the disruption for hospitality suppliers also signaled an opportunity for deal-making, according to Stein. VIP experienced a precipitous drop in demand for its products, but the same was also true for VIP’s competitors.

On March 18, VIP merged with Boston Trade International, a deal that boosted earnings for the newly-combined entity. “[VIP] actually doubled its revenues and its EBITDA in the pandemic,” Stein says.

M&A activity has ticked up for Blackford, reaching levels not seen since 2015. “It feels like this quarter that everyone is trying to get every deal that they didn’t get done last year completed,” Stein says.

Adjacent to lodging, air travel is also not expected to reach pre-pandemic capacity in the next year, but long-term prospects are promising, according to Resilience’s Rosen.

Flexjet, a Resilience portfolio company focused on private air travel, has returned to pre-virus performance. The company struggled in March and April of 2020 at the height of the pandemic—but unlike much of the aviation industry, the business rebounded quickly due to travelers opting for private jets as a safer way to travel in the pandemic environment.

While it may take some time for the economic recovery to reach all industry segments, Rosen likens the years ahead to the Roaring Twenties that followed the Spanish Flu outbreak in 1918.

“There’s a feeling of wanting to get out, a feeling of fragility in life,” he says. “We’re going to see very nice growth for the next couple of years.”


Benjamin Glick is Middle Market Growth’s associate editor.