When it comes to identifying a company to bring into their portfolio, private equity firms look for a handful of desirable attributes that smell of success. Searching for an attractive food and beverage company is no different. From essentials in company fundamentals such as strong brand recognition, differentiated products or services and a strong management team, to unique qualities such as operating in an attractive niche and possessing multiple growth avenues, there are certain attributes of a food and beverage company that whet the appetites of private equity firms.
During a recent panel discussion, select groups of private equity firms that have made recent investments in food and beverage companies gave their views on the middle-market food and beverage industry. The panelists included:
- Andy Unanue – Managing Director – AUA Private Equity Partners
- Ed Benford – Managing Director – Benford Capital Partners, LLC
- Chaoran Jin – Managing Director – Keystone Capital
- Meranee Phing – Partner – The Riverside Company
In an excerpt from Private Equity Craves Specialty Food Companies, the panelists detail what they feel are some of the most desirable attributes that companies in today’s food and beverage market can bring to the table.
What attributes do you look for in a portfolio company?
AUA: We identify an ideal portfolio company based on foundational, operational and strategic elements. The foundation of our investment process begins with identifying companies that fit our industry expertise, deliver a quality product or service that we believe in, and share our vision for partnership. We focus on family-owned and/or Hispanic-oriented businesses across three verticals – consumer, media and business services (replicating my experience in food and beverage); branding and marketing; and logistics, warehousing and distribution. In addition to focusing on companies we can add value to through 4-5 indefinable goals, we focus on opportunities where the existing owners place an emphasis on strategic partnership and invest alongside us in the future of the business. We believe that if we stick to what we know, execute on four – five operational initiatives and invest in quality businesses, founders and management, we can deliver a base-line return to our investors.
We generate most of our returns through earnings growth as opposed to leverage. Therefore, attractive companies exhibit favorable category, or sub-category, dynamics and value-add products or services, and through AUA’s expertise and relationships – new sales opportunities, actionable operational improvements, alpha through ESG initiatives, opportunities for product expansion, and brand development potential. We focus on identifying and refining our approach to these factors through our due diligence and crafting a vision for success alongside the existing owners and management.
By remaining disciplined to our foundation and successfully executing on operational initiatives, we open the door for excess value creation. Outsized value is generated through the materialization of macro and demographic tailwinds, in-line with our vision developed during due diligence, and meaningful new business opportunities through acquisitions, innovation and channel expansion. We place a strong emphasis on evaluating the long-term and strategic possibilities of potential portfolio companies. Which, as simple as it sounds, comes back to maintaining focus on our foundation. These fundamental pillars form the basis of what we call our Value Creation Methodology or Value Pyramid.
Benford: For starters, we’re looking for a defensible niche. Whether it’s a brand or product that matters or a unique service business, we’re always looking for something that’s defensible and durable. The next thing we look for – as I mentioned earlier, we’re long-term oriented investors – is the team. We’re really looking to see if these are people we feel we can be partners with for a long period of time. Fit with the team is very important to us, we spend a lot of time with our portfolio companies so we do really need to check that box. If the owner/founder is retiring that’s ok too, we just want to make sure we have a workable transition plan in place and that we still feel like there’s a good fit with the rest of the team. Lastly, we look for growth potential. A handful of ways we think we can grow the business over time. If we roll up our sleeves and work with the team over the next five, 10, or 10-plus years - can we build a more successful business over time? That’s important to us as well.
Keystone: At Keystone, we look to partner with exceptional management teams at market leading companies focused on an attractive niche. By finding market leaders that are highly specialized in one solution offering or isolated to one region, we enable ourselves to start small with a winning team and culture while giving ourselves multiple avenues to expand organically and through acquisition into new geographies, new markets and new capabilities. Like all investment firms, we look for the essentials in company fundamentals such as high cash flow conversion, strong brand recognition, scalable operations, revenue visibility, differentiated solution offering, and positive industry tailwinds, to name a few. Above all else, we are hyper focused on the quality and integrity of the management team and the depth of the broader talent pool.
Riverside: At Riverside, we look for the following (a) market leadership, (b) competitive differentiation, (c) numerous growth opportunities, (d) attractive business model economics and positive cash flow dynamics and (e) strong management teams.