Private equity in the food and beverage space

October 2015  |  FEATURE  |  PRIVATE EQUITY

Financier Worldwide Magazine

Although not a unique phenomenon, the food and beverage sector does appear to have been somewhat recession-proof amid the global economic downturn of recent years. This durability, set alongside a gradual but definite shift in eating and drinking habits, has led to the food and beverage sector being singled out as having huge growth potential, whetting the appetite of private equity investors interested in doing deals.

According to analysis by Grant Thornton, 35 transactions involving private equity investors took place in 2014, either investing in the UK and Ireland or acquiring UK assets from overseas. This activity represents an 84 percent increase on the volume of investment seen in 2013. As far as 2015 is concerned, there have been a number of sizeable transactions. These include the sale of Adelie to HIG Capital Europe, the £219m acquisition of France-based refrigerated pastry dough manufacturer Cérélia by IK Investment Partners SAS, and the £144m acquisition of Italian sponge cake manufacturer by CapVest, part of its buy-and-build campaign for investee company Valeo.

A palatable proposition

The food and beverage sector, it seems, is ripe for investment. As far as the UK is concerned, UK-based private equity groups have been acquiring both in the UK and overseas. And on a smaller scale, UK assets are also attracting interest from the US and other overseas private equity investors. “In general terms, the food and beverage sector is relatively safe to invest in compared to other sectors,” says Trefor Griffith, head of food and beverage for Grant Thornton UK LLP. “Whilst investors will typically have to forfeit any explosive growth in a target, they will be comforted by steady growth and a sector that is familiar and accessible, given we are all consumers.”

Private equity, says Mr Griffith, is particularly attracted to branded offerings, many of which have been neglected by the large food groups. And, he vouches, there are a number who continue to rationalise their portfolios and sell non-core brands. “The market remains very fragmented so there are opportunities for investment and consolidation, which is particularly attractive to private equity investors seeking a suitable platform for buy-and-build strategies,” he explains.

According to Nigel Bannerman, investment director at Silk Invest, interest remains strong because the food and beverage industry, while almost the very definition of stable, is also subject to changing consumer trends. “So you have a fundamental need which is also evolving and that creates opportunities to generate value,” he says.

Key considerations

As they would when investing in any sector, organisations should familiarise themselves with how the food and beverage space stacks up in terms of risk. According to Mr Griffith, the shortage of skills in the sector is a particularly pertinent issue, and one that requires deft handling. “As with any investee company, management is vital, however this is particularly relevant to the food and beverage sector where there is a shortage of skills coming through due to the number of graduates entering the sector historically. This is seen as a key issue for the industry more generally and new staff will be required over the next 10 years in the sector to replace retiring staff, from frontline production staff to top managerial level.

“Businesses must also have key products or brands, and longevity is also vital. A company’s products must still be in vogue in five years’ time when private equity investors are likely to be seeking an exit,” he adds.

Increasing regulation

Those looking to get involved in the food and beverage sector must of course ensure they are privy to the raft of food safety regulations that apply to the industry. For some investors, the increasing level of regulation being thrust on the sector is having a definite impact on whether they choose to get involved. “Our focus is African consumer markets and in those markets there is an increase in the level of regulatory involvement,” observes Mr Bannerman. “This has raised the bar for companies in terms of launching new products. And increasing public expectation that products should be properly certified is driving demand to more formal manufacturers, which is where we invest. The food and beverage industry in Africa will become more formalised and industrial in scale and private equity will be a funding tool supporting that, particularly for mid-sized players.”

For Mr Griffith, the state of the market is more of a concern than legislation, as far as UK companies are concerned. “There have been some Competition and Markets Authority (CMA) enquiries that will concern companies seeking a consolidation play, but the supermarket wars issue is probably more at the forefront of investors' concern than growing regulation,” he says.

Conclusion

In light of the relative safety of investing in the sector, and the significant investment opportunities available in such a fragmented market, interest in the food and beverage space is expected to remain strong in the coming years, as an attractive proposition for private equity investors.

© Financier Worldwide

BY

Fraser Tennant