Why is Cycling a Private Equity darling?

Private equity has increasingly turned its attention to the cycling sector, there have been some high-profile investments in recent years.

But why are cycling brands getting all this attention from private equity?

Positive long-term outlook

Aside from the recent post covid glut of inventory, the cycling industry has experienced significant growth in recent years. Private equity investors recognize the potential for substantial returns in a market with long term outlook for expansion.

Electrification of Cycling

Technological advancements, particularly in electric bikes, have also played a significant role in capturing investor interest. The emergence of electric bikes has broadened the appeal of cycling and opened new possibilities for innovation and market penetration.

Cycling is resilient

The cycling industry has demonstrated resilience during economic downturns, making it an attractive investment option for private equity firms seeking stable returns. Even in challenging times.

Cycling is fragmented

The fragmented nature of the cycling market presents opportunities for consolidation and integration, allowing private equity investors to create synergies and enhance operational efficiency. This consolidation can lead to increased profitability and growth.

ESG and Sustainability

Sustainability and environmental benefits associated with cycling align well with the growing emphasis on ESG considerations in investment decisions. Private equity investors are increasingly focused on investing in businesses that promote sustainable practices and contribute positively to society. Cycling ticks all these boxes.

Expansion Opportunities

Lastly, the cycling sector offers potential for expansion and internationalization. Private equity firms can provide the necessary capital and expertise to support companies in expanding their presence in new markets, capitalizing on global trends in cycling.

Is Private Equity good for cycling?

Here are some potential advantages and disadvantages of private equity in the context of the cycling sector:

Pros:

1. Capital Infusion: Private equity firms can provide significant capital to cycling companies, allowing them to invest in research and development, expand production capacity, launch new product lines, or enter new markets. This injection of funds can accelerate growth and help cycling companies realize their potential.

2. Operational Expertise: Private equity firms often have extensive experience and knowledge in managing businesses. They can bring in specialized expertise to help optimize operations, improve efficiency, and enhance overall business performance within the cycling sector. This guidance can be valuable for companies looking to scale or navigate challenging market conditions.

3. Strategic Guidance: Private equity investors can offer strategic guidance and support to cycling companies. Their industry knowledge and network can assist with market analysis, identifying growth opportunities, and developing effective business strategies. This guidance can help cycling companies position themselves for long-term success.

4. Access to Networks: Private equity firms typically have well-established networks of industry contacts, potential partners, suppliers, and customers. These networks can be leveraged to open doors for cycling companies, enabling them to forge valuable relationships, secure distribution channels, and expand their market reach.

Cons of Private Equity in Cycling:

1. Loss of Control: When private equity firms invest in cycling companies, they usually acquire a significant ownership stake, which can lead to a loss of control for the original founders or management team. The private equity firm may have its own agenda and may prioritize short-term financial returns over long-term strategic decisions, potentially leading to conflicts of interest.

2. Short-Term Focus: Private equity investors typically have a finite investment horizon, typically around 3-7 years, during which they aim to generate substantial returns. This short-term focus may lead to pressure on cycling companies to deliver quick results, potentially compromising long-term sustainability or innovation in favor of immediate financial gains.

3. Financial Leverage: Private equity deals often involve significant borrowing or leveraging of a cycling company’s assets. While leverage can provide additional capital, it also increases the financial risk. If the company fails to meet its financial obligations or faces a downturn, the burden of debt can become overwhelming and jeopardize its stability.

4. Potential Restructuring: Private equity investors may undertake restructuring efforts to improve the financial performance of cycling companies. This could involve cost-cutting measures, layoffs, or changes in strategic direction, which may impact the company’s culture, workforce, and long-term prospects. It is essential to consider the potential social and human implications of such actions.

Recent PE Investments in Cycling

Here are some of the most high profile investments from recent years in the cycling sector:

• Pinarello – USA Based PE firm L Catterton, bought 80% of the Italian bicycle brand for 90 million in 2016. Pinarello has shown significant growth in recent years and now the firm is reportedly to exit with a €250mln valuation in 2023.
• Colnago – The UAE based Abu Dhabi fund purchased 100% of the historic bike brand in 2020 for a reported €25mln or 1:1 price to earnings.
• MVC Group – In February 2019, Equinox Investments, an Italian private equity firm, acquired a 40% stake in Manifattura Valcismon, the Italian sportswear company that owns the brands Castelli and Sportful. The investment was reportedly worth €90 million.
• Canyon – December 2020, Groupe Bruxelles Lambert (GBL), a Belgian investment company, acquired a majority stake in Canyon Bicycles, a German manufacturer of premium bicycles. The deal was reportedly worth €800 million.

Investment from private equity funds in cycling is here to stay. More investment means more visibility for the sport and innovation. Family run companies often fall into the trap of stagnation. The case against private equity is its short-term outlook and enormous pressure to generate returns. Is this good for cycling overall? Only time will tell.