Private equity's appetite in the food industry

Due to impressive growth in specialty foods sales, new products and brands, changes in consumer tastes, and other industry factors, private equity groups have developed significant interest in targeting investments in specialty food companies. There are a significant number of middle-market food and foodservice companies, representing a considerable amount of consolidation opportunities. When it comes to identifying attractive targets, private equity firms are looking for ones who are niche, value-based businesses that are durable and stable, while also having capacity for substantial organic growth.

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 describe their current interests in the food and beverage market.

AUA: Given my real-life expertise in the space we are particularly keen to invest in food and beverage. Four of our five existing platform investments in the fund are in food and beverage and we will likely add one or two more platforms in this space for Fund 1. Some examples of our portfolio companies include:

• Raymundos Food Group is a value-based Hispanic-oriented consumer packaged goods (CPG) company focused on branded and private label refrigerated desserts including gelatins, flans, puddings, and other ready-to-eat products
• Tijuana Flats is a fast-casual restaurant chain offering made-to- order Tex-Mex cuisine with fresh ingredients with over 120 corporate and franchise locations in the Southeastern U.S.
• Indulge Desserts, which is more of a holding company as we continue to execute on our thesis of building an institutional desserts platform through acquisition, is a manufacturer of premium gourmet desserts, offering a full line of American and international/ethnic, all-natural products to foodservice distributors, restaurant chains, and grocery throughout the U.S.

Benford: We recently acquired a company called Saco Foods located in Middleton, Wisconsin. Saco is a niche, branded food business with a strong presence in three categories: (i) hard-shell dips in chocolate and vanilla flavors, (ii) powdered milk/regular flavor, as well as chocolate and strawberry flavors and (iii) shelf-stable baking products, primarily cocoa and buttermilk. What we have in Saco Foods is an established business that’s been around for a long time with a strong presence in three niche categories. In addition to organic growth and building within the categories Saco is currently in, we have interest in add-on acquisitions of other smaller niche food products businesses, typically ones that are below the radar of larger food companies. Within smaller niche food categories, we like businesses that are durable and stable, and that have a consumable and recurring piece to them. Over time, we definitely expect to make strategic add-on acquisitions around Saco. Our hard-shell dip products are primarily marketed today in the produce section, so when we think about our distribution, companies that are that are also in that section of the grocery store would make a lot of sense. Our milk and baking products are more center-store and that's fair game for us too as far as add-on acquisitions.

Keystone: Keystone has always had an affinity for the food industry. We first found success with an acquisition in the bakery space, partnering with the team at a leading supplier of cupcakes and other baked goods to the in-store bakery channel. Our most recent efforts have been targeted towards growing ethnic niches, culminating in our 2016 acquisition of Nature Soy, a producer of tofu, soy milk and other natural foods. We’re focused on bringing authentic Asian food to U.S. consumers. We are continuing to focus on organic growth and aggressively pursuing strategic acquisitions in the Asian food niche. Outside of our initiatives with Nature Soy, we are bullish on the food sector in general and remain open-minded and opportunistic in pursuing new investments across the broader food and beverage space, including the food ingredients, research and development, and testing markets.

Riverside: We’re taking a proactive approach in food and beverage and have identified high areas of interest which include snacking, ethnic foods, fresh/healthy, infant/juvenile, allergen-free, clean label, plant protein and packaging formats (on-the-go). A couple of initiatives we’ve embarked on include:

• Actively partnering with Richard Lan, our food and beverage senior advisor. Richard was formerly COO of Maple Leaf Foods, a leading CPG company, and knows the North American food market and channels intimately.
• Organized a strategy session of consumer investment professionals from all of Riverside’s funds globally to get together with our food and beverage senior advisors and other industry leaders and experts.  We narrowed down the large ubiquitous food and beverage industry, synthesized macro trends and segmented the industry.
• Worked with a business intelligence firm with digital scraping technology to look at the consumer landscape, consumer needs and a company’s brand equity viewed online. This firm helped us develop an acquisition target model based on custom algorithms and Riverside’s investment criteria.

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