My most popular article of 2023 was about why private equity has been active in the cycling industry in recent years. I thought I would revisit the topic and dive deeper.

For the uninitiated, private equity is generally an investment partnership that buys and manages companies with the intent of selling them at a later date. Private equity firms operate these investment funds on behalf of investors.

Private equity is often grouped with venture capital and hedge funds as an alternative investment. Investors are usually required to commit significant capital for years, which is why access to such investments is limited to institutions and individuals with high net worth.

Private equity has a specific aim to earn a profit within a specific time horizon. Remember this fact because it will come into play later.

Private equity firms buy companies and overhaul them to earn a profit when the business is sold again. Capital for the acquisitions comes from outside investors in the private equity funds the firms establish and manage, usually supplemented by debt. Sometimes lots of debt.

Imagine a family-owned cycling brand valued at 20 million euros with very little debt before the private equity investment. Depending on the situation, once the investors come in, the company can find itself highly leveraged with massive debt payments and intense pressure to produce growth at all costs.

Private equity works in high-growth, low interest rate environments. It works when number go up. Before COVID and up to 2022, the money was flowing, and everybody felt like a genius.

An acquisition by private equity can make a company more competitive or saddle it with unsustainable debt, depending on the private equity firm’s skills and objectives. 

There are a couple of factors that have made this type of investment mechanism, for the most part, unsustainable in the cycling business. With the increase in interest rates in 2023 to cool inflation, and the slowing demand in the cycling industry due to massive overstocks, the entire private equity model has essentially been turned on its head. 

Global private equity and venture capital deal value and volume in 2023 were at their lowest in at least five years. Transaction value declined 34.7% year over year to $474.14 billion, while deal count fell to 12,016 from 17,549, according to S&P Global Market Intelligence data.

Macroeconomic factors aside, I am unsure that the profit at all costs type of management philosophy can work in the cycling industry, at least not in the long term. Cycling is a small and quirky business that requires particular attention to the needs of the customer. At times companies must be willing to weather the storm by burning cash reserves, with PE this is not possible. When the number go down, you must cut. This can leave companies going to extreme measures to meet their sales and EBIDTA goals. I.e. cost cutting in the short term regardless of the long-term damage.

When times are good, and interest rates are low, Private Equity can be a great solution for an entrepreneur that wants to retire and doesn’t have family to take over. When the storm clouds appear, like we saw starting in late 2022, things get much more complex.