Private equity in food: overview
- Private equity targets food companies to create value through consolidation
- Fragmented food markets enable buy and build acquisition strategies
- Health and wellness businesses attract investment due to consumer demand
- Stable food demand helps investors diversify portfolios and reduce risk
- Manufacturer divestments create acquisition opportunities for private equity firms
Private equity (PE) is strengthening its presence in the food landscape. PE firms are targeting food and beverage companies, big and small, sometimes taking off chunks – brands or segments – and sometimes swallowing companies whole.
For example, ingredients company IFF recently offloaded its food ingredients business to private equity firm CVC Capital Partners, and holding company Yum! Brands agreed to divest the majority of Pizza Hut to the firm LongRange Capital.
PE is driving consolidation and expansion in the food sector, and even pushing for efficiency gains, digitalisation and portfolio optimisation and for some food companies.
But why is it interested in food, a sector that is often viewed as low-growth and asset intensive?
Value creation is private equity’s priority
Private equity is interested in food, first and foremost, for the same reason as it would be interested in any other sector.
“Private equity is always interested in trying to create value,” says Cyrille Filott, global strategist for consumer foods, packaging and logistics at Rabobank.
Food opens up opportunities for PE firms to do so. Private equity companies often utilise a ‘buy and build’ strategy, explains Filott. This means that they buy a larger ‘platform company’, which they can then incorporate smaller companies into.
The European market is “relatively fragmented”, says Thijs Geijer, sector economist for food and agriculture at ING bank, which enables private equity firms to build up larger platforms.
In other words, the fragmented nature of food helps enable private equity to buy up these smaller companies through such ‘platform’ companies.
While smaller companies are often acquired for a relatively low price, once they are consolidated into a platform, said platform will likely have a higher valuation once it is sold on, according to private equity firm Auctus Capital Partners. Therefore, private equity firms can create value through buy and build.
Buy-and-build opportunities such as these often do not exist for publicly traded companies, points out Rabobank’s Filott.
In order to build strong value in their portfolios, private equity is looking for on-trend businesses to snap up. The most attractive such sector for private equity is health and wellness, according to Shivya Puri, senior research analyst at market intelligence firm Mordor Intelligence. Consumers are increasingly flocking towards products that can provide functional benefits and preventative health.
Other growth segments attracting investment include ingredients, bakery and private label, says ING’s Geijer.
Private equity is also drawn towards food because it represents stability, he suggests.
“Compared to other sectors, food companies operate in a market that has stable demand, so it helps PE firms to diversify and balance risks.”
What is the future of private equity in food?
Private equity is buying up large sections of the food and beverage landscape. But this is not a new trend, Filott points out.
“I do not believe there is a big shift in the market right now,” he says. “PE is always looking at opportunities, and some PEs focus on consumer and food. They have done so for a long time and will continue to do so.”
Yet the trend among food manufacturers themselves tends towards divestment, suggests Geijer, providing opportunities for private equity.
Food, with its fragmented nature and reliable demand, provides strong opportunities for private equity. These opportunities are unlikely to go anywhere anytime soon.
