PE gets in on CPG
The Business of Food
by Jennifer Barney
PE gets in on CPG
3-min read
Startup acquisitions by PE (private equity) a decade ago were generally not awesome deals. Not so today.
Capital markets change with time. Right now, there’s lots of cash everywhere. One thing that has changed for CPG is PE getting in on deals they previously would have never touched. Where there are strategic investors (like corporates and their venture funds) and financial investors (traditional VCs), now there are PEs.
Historically, PE wouldn’t offer the big multiples of strategics or financial investors so CPG has not been their thing. PE likes to sniff around for downstream plays like manufacturers that have a quicker time reaching profitability. PE is also good at swooping up companies in distressed situations where they can get a “deal” (undervalued asset) - like a startup that has some traction but having trouble getting the next round of funding.
Here’s a real life example of a distressed sale to a PE back then:
bootstrapped business to $750K revenues in year 2
hooked up with supplier as investor-partner
built a manufacturing facility (think lots of capital tied up in hard assets)
2.75X annual revenue growth rate with good velocity and margins
but not yet profitable
supplier partners crapped out due to misaligned vision with the brand and family succession problems
This is a perfect storm for PE. A decade ago there was little interest from VCs to invest in CPG and strategics weren’t even thinking about early stage investments. In this example, the PE was all wall street and no food synergies. Given no other options, the PE had their way, and the founder was diluted to minority ownership earlier than should have been (this isn’t the big problem) with a majority partner that doesn’t understand the business (this is the big problem). Stalled out on growth at ~$20M, the brand went searching for outside capital and was unsuccessful in raising. With the PE as boss, the day-to-day was not fun for the founder, who began to get that Sunday night pit-in-the-stomach about going to “work”.
Post-acquisition, founders can be contract bound to continue to run their companies for a period of time (and sometimes the acquirer lets the brand run autonomously forever). The thing is, to be successful post acquisition, the brand will need a parent that is strategic to the industry, aligned to the mission and vision of the brand, and offers some benefit to the bottom line.
Founders have better options now, including PE getting in more holistically. This could mean a vertically integrated roll up.
“This is actually pretty interesting because it can create a lot of supply chain efficiency, particularly around freight and warehousing… and also provides a bigger base or a bigger EBITDA base to grow a brand”, says Nick McCoy, managing partner at Whipstitch Capital.
Profitability
The other factor influencing this trend is the focus on profitability. See last post on this. Pre-Covid, investors were already shifting from topline hockey stick type companies to those with capital efficiencies to the bottom line. It’s proved to be a better measure of success and returns, and plays right into the PE model.
Depending on who the PE is, they might not be as good at growing brands as other types of investors. But they be a great adjacency link.
As always, seek professional guidance before taking action. See references in last post.
All my best,
Jennifer
I'd love to hear from you - get in touch at jennifer@3rdandbroadway.com