These Five Signs Point to Rising Rates. What Can PE Firms Do?

As we turn the corner into February, Redwood’s market analysis has uncovered five trends that should concern private equity (PE) firms. These signs point to tightening transportation capacity and rising freight rates as we kick off 2025. 

Why should PE firms be concerned about this situation? Because their commitment to shareholders is to generate value in their portfolio companies by growing revenues, driving high levels of customer service and controlling costs. Not only is the transportation function central to delighting customers and creating loyalty, but it’s also an enormous cost center — and those costs look like they’re about to grow significantly, based on current market signs. 

Here are the five data points and trends that should have PE firms and their portfolio companies concerned right now: 

Spot freight includes transportation loads that are booked one by one, or “on the spot.” This on-demand relationship provides more flexibility for shippers than a long-term service agreement with a single carrier. But spot freight providers are becoming very busy. In fact, they’re rejecting outbound loads at a rate that’s 44% higher than it was in January 2024. Some portfolio companies have probably become comfortable using spot carriers, instead of signing a long-term carrier contract or working with a freight broker. But, as the spot market gets busier, rates will naturally go up. PE firms and their portfolio businesses need to start looking for a new strategy, because shopping for capacity on the open market is becoming riskier every day. 

The Morgan Stanley Truckload Freight Index (MSTLFI) measures incremental truckload demand versus incremental truckload supply. In the logistics industry, it’s viewed as a key indicator of truckload freight availability. This index has been outperforming seasonal averages for months — and started January at its strongest level in six years. Fast-growing demand is a sign that capacity might not be able to keep up. PE firms should make sure their owned companies are looking ahead and preparing for this imbalance, with alternative carriers and transportation modes lined up in advance. 

Across the U.S., long-distance truckload employment is down. The Quarterly Census of Employment and Wages, published by the U.S. Bureau of Labor Statistics, shows that nationwide truckload employment has dropped to 518,000 — which represents the lowest level since 2021, and the largest year-over-year decline since early 2020. Due to a soft transportation market, many carriers have exited the industry; in fact, 2,000 carrier authorities exited in January alone. The Trump Administration’s new immigration policies are expected to remove legal immigrants from the driver pool, further tightening U.S. truckload capacity in 2025. 

Contract rates are also rising as we kickoff 2025, and the contract-to-spot rate spread is tightening. While contract rates are increasing much more slowly than spot rates at this moment, this highlights the need for PE firms and portfolio companies to lock in attractive contract rates now. We may be looking back in a few months and realizing how relatively low contract rates are right now. A knowledgeable freight broker is an invaluable resource at these moments when the market seems about to tip.  

This year will bring significant changes to the National Motor Freight Classification (NMFC) system created by the National Motor Freight Traffic Association (NMFTA). These changes will produce positive long-term impacts by replacing the current, complex less-than-truckload freight classification system. The current classification scale considers cargo weight, special handling needs, cargo value, and hazards and risks — but in the future, loads will be classified based on fewer factors. The new classification system will allow for more uniform pricing based on actual shipment characteristics. However, the impacts for individual companies are unclear, and the new classification system may result in significant cost increases for some shippers. PE firms and their portfolio companies should consult an expert about how these changes will negatively impact their costs — and adopt forward-looking strategies for mitigating those impacts.   

Prepare Now for Higher Rates and Tighter Capacities 

The bad news: These five trends clearly indicate that freight rates are rising as we turn the page on January. It’s impossible to avoid these rate increases, which are a natural result of growing demand and tightening capacity.  

The good news: PE firms and their portfolio companies can start working smarter right now to prepare for these future market conditions. From adopting innovative top-level supply chain strategies — like a new network design or carrier mix —  to optimizing daily activities like load building and shipment consolidation, there’s a lot that portfolio businesses can do. By making intelligent choices, they can keep transportation costs as low as possible, while still meeting customer service and growth targets.  

In a changing market situation like this one, the smartest thing PE firms can do is partner with Redwood on transportation optimization. As a modern, full-service 4PL, Redwood offers every capability PE firms need to profitability navigate 2025, from supply chain advisory to freight brokerage, managed transportation and digitalization. In a freight market that’s signaling volatility, consider this your sign to partner with Redwood today.