Just like any other industry, the food and beverage industry presents private equity firms with a handful of unique operational and transactional challenges. On the operational side, such challenges include the identification and retainment of key individuals, and understanding and capitalizing on growth opportunities. On the transaction side, increased competition and finding fair deals represent two of the biggest challenges facing private equity firms in today’s market.
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:
In an excerpt from Private Equity Craves Specialty Food Companies, the panelists describe the operational and transactional challenges facing private equity firms in today’s food and beverage market.
What do you see as operational challenges and transactional challenges in the food and beverage industry?
AUA: The operational challenges are similar to what you see in most businesses. How do you achieve growth? How do you get families to grow the management team? How do you groom and work with management to execute on a growth strategy?
One of the areas we are spending a lot of time on is within environmental, social, and governance (ESG) - we believe there is an opportunity to increase alpha in our deals by following an ESG framework. For us, ESG includes work cleaning up the labels/improving ingredients, better-for-you foods, workplace safety, cleaner equipment, and more. We think about this as early as the due diligence process all the way through to running the day-to-day operations of these businesses.
As far as transactional challenges, finding deals at fair prices is probably one of the biggest challenges we face today. It’s not easy staying disciplined in the food and beverage environment where companies are trading at double digit multiples and a lot of our competitors can justify five-times or more leverage. Also, making sure families and management teams are truly interested in a transaction can be a challenge. We always like to make sure the family is truly interested in partnering with AUA and we spend a lot of time educating them on what bringing a strategic partner means for them and their business. We ultimately think this is one of the biggest decisions they will ever make and are firm believers that everyone should be happy at the table if we are going to make the business successful in the long-term. We’ve had due diligence periods go from 45 days to close all the way to three – four years to consummate. A major challenge is explaining to families that we’re not a traditional finance-only private equity firm, but one with a strong operational background that truly cares about the corporate culture. We try to be as upfront as possible about the possibilities ahead, and are also fully transparent that the process of having third parties go through all of your business issues with a fine-tooth comb is not an easy one.
Baker Tilly Capital: How much does it help coming from a well-known family business?
AUA: It helps tremendously getting in the door, there’s no doubt about that. Once we’re in, it’s really up to the whole team to perform and prove why we make the most sense as a partner.
Benford: Generally speaking, finding and retaining great people is always a challenge and a priority. In these smaller businesses your resources can be constrained and maintaining focus and prioritization on the highest and best use of time and resources is always an ongoing board and management challenge. With respect to Saco and what we’re doing in food, I would say the most obvious challenges, and they’re really opportunities in front of us, are related to growth. We need to expand our facility - it’s a high class problem. We’ve introduced a number of new products and the company is growing at a substantial rate right now. Operationally, we need to add to our footprint. Along the way we want to add some great people to our team as well. We view that as more of an opportunity than a challenge, but something we’ll be focused on in 2017 and 2018.
Probably the biggest transactional challenge that we’re seeing - and I’d expect to be shared by the other firms - is the multiples that interesting food companies are selling at. In today’s market there’s just a lot of interest in the category both from strategic and financial buyers.
Baker Tilly Capital: Do you feel the growth rates of specialty foods help rationalize some of the multiples that you’re seeing?
Benford: I think there’s definitely a correlation. There are some categories where you see dramatic growth and if you have solid growth, combined with a strong brand and a great team, that’s going to sell at a really robust multiple in today’s market.
Baker Tilly Capital: Are you willing to take on some damaged businesses just for the multiple or is the resource too scarce to turn them around?
Benford: Yes, we are. We are operationally-oriented investors so we look for opportunities that are maybe a little bit below the radar in terms of size or management depth. Or maybe it’s a little bit of a fixer-upper with respect to the facility, sourcing, product development or sales and marketing. Or maybe it’s a mature brand that hasn’t been growing, but if you can do something differently over time, you can change that equation. We’re very interested in situations that may not check all the boxes for a larger strategic buyer or a larger private equity fund. We are very much willing to roll up the sleeves and look at things outside the box.
Keystone: On the operational side, it is important to understand that there is a black art associated with food manufacturing, both on the product development side as well as the plant management and optimization side. There is often a lot of know-how and intuition from having been in a specific food manufacturing business for many years. Actively identifying and retaining these individuals and aligning interests appropriately is key to a successful investment. Food safety is another area that deserves special attention, a focal point of the diligence process and an ongoing initiative to elevate operations above and beyond the baseline requirements. Given that investment firms are most often looking to grow operations on an expedited timeline, factory capacity and shift optimization are critical parts of the diligence as well. Investors need to put in the work up front not only to understand and quantify the growth opportunity, but to develop a deep appreciation for the operational changes to staff, machinery, factory space and logistics that are needed to support those growth initiatives. On the transaction side, given all of the reasons to like the food and beverage industry discussed above, competition in the M&A market has increased and valuations have risen as a result. Investors must find ways to differentiate themselves and be willing to roll up their sleeves to find the right investments at the right price.
Riverside: One operational challenge is the war for talent for executives or outside board directors with digital experience. We’re living in an increasingly digital environment so companies need to have a digital, online marketing and social media strategy. One of the most sought after management positions is for a chief marketing officer that understands the digital world and millennials, which is the largest living generation. A transactional challenge is that strategics are coming down market. So while strategics are buyers of our businesses, they’re also competitors.