Between the 1990s and the beginning of the 2010s, private equity firms poured billions of dollars on major U.S. retailers, apparel and accessory brands, and food chains, completely changing the consumer sector. However, the major players in the industry, like as Carlyle and Warburg Pincus, have collectively reduced their investment in the previous ten years, a reflection of shifting consumer preferences and competition from family offices and corporate buyers.

According to Dealogic data, investments in retail and consumer industries made up barely 7% of the $2.6 trillion in private equity deal volume in the United States during the last ten years, as opposed to roughly 15% of the $1.7 trillion total during the previous ten years.

Private equity firms such as Carlyle, Bain, Blackstone, and others made significant profits when they “exited,” or sold, their investments in street clothes company Supreme, McDonald’s China, discount retailer Dollar General, and crafts retailer Michaels.

In the end, the industry is witnessing a race amongst modern investment firms to close the gap created by the departure of the larger corporations. Due to reduced competition from private equity on price, big consumer brands like Unilever and L’Oreal are also increasingly landing deals for their smaller counterparts.

This explains why large bets on the industry are no longer being made by private equity groups.

Which Big Companies Have Quit Investing in Consumer Goods?

Other than Carlyle, no one is actively searching for possible consumer and retail (C&R) targets: Warburg Pincus, THL Partners, and Centerbridge Partners.

In an internal statement sent to its employees last year, Carlyle stated that it was abandoning its acquisition strategy and would no longer be making investments in consumer and retail companies situated in the United States. “Increasingly challenging investment trends in this space” was the reason given by Carlyle for the decision.

According to a person familiar with the situation, Warburg Pincus stopped funding US C&R startups five years ago in order to concentrate on potential in other industries. THL has not made a single consumer investment in the previous six years, and its C&R team is now covering technology and business services more and more.

A second source with knowledge of Centerbridge’s approach states that the company changed its focus to branded industrial companies approximately five years ago.

Why Are Businesses Reducing Their Investments in Consumer Businesses?

The COVID-19 epidemic and the challenging macroeconomic climate that has harmed consumer goods companies in recent years are both partially to blame for the retreat.

In 2020, the global pandemic caused disruptions to supply chains, making it difficult for the consumer products sector to recover.

Over the past two years, rising loan rates and market volatility have made the problems facing consumer goods companies even worse.

Why Is Large-Scale Investment in the Sector Difficult?

The foundation of the success of the private equity business model is investments in sectors of the economy that are basically recession-proof, stable, and produce predictable cash flows.

Companies that produce consumer goods, which have historically been resilient to periods of market turbulence, are becoming more and more susceptible.
A generational shift in consumer behaviour has also been brought about by the enormous rise of e-commerce over the past ten years. As a result, customers are increasingly preferring online merchants like Amazon, which is driving down foot traffic at physical retailers like Macy’s and Kohl’s.

Also, there are now much less obstacles to entry in the industry. Entrepreneurs and social media celebrities are increasingly launching well-known consumer businesses online. These brands can grow quickly without incurring significant advertising costs.

Nonetheless, because it might be difficult to convert an ordinary customer into a devoted one, customer acquisition costs continue to be expensive.

Investment committees have been obliged to reconsider their approach to significant consumer wagers due to these business realities. Moreover, huge businesses have had to commit larger sums of money to each investment due to the rapid expansion of private equity funds. Due to the lack of major, high-quality retailers and manufacturers, investors are being driven to look for opportunities in other sectors of the economy.

Is There More Competition Among Big Companies for The Best Companies?

In a challenging climate for debt financing over the last 12 months, financial sponsors faced off against well-capitalized consumer giants, forcing private equity firms to adopt a more cautious approach.

For example, L’Oreal won the auction for luxury cosmetics company Aesop, Unilever defeated big investment groups to purchase haircare brand K18 and frozen yoghurt brand Yasso, and Mars defeated private equity firms to acquire healthy-meal manufacturer Kevin’s Natural Foods.
Prospects for private equity have also been harmed by family office competition. As an illustration, last year Redwood Holdings, the family office founded by wealthy staffing industry veteran Jim Davis, paid almost $4 billion to acquire Newly Weds Foods, making it one of the biggest acquisitions of a consumer company in 2023.

Who Is Stepping Up To Take Private Equity Firms’ Place?

To bridge the void left by large sponsors, a new wave of middle-market and growth-equity investment firms is focusing on small-scale consumer and retail businesses.

In 2022, Jay Sammons, the former head of C&R at Carlyle, departed the company to create SKKY Partners alongside Kim Kardashian. SKKY, a consumer and media investment firm, made headlines last year when it revealed its first partnership, a minority stake in the condiments company Truff.

“There are obviously a lot of great incumbent brands out there that have been around for a long time and have very strong market positions and there’s a place for investments in those areas, but our perspective is that the growth prospects of the disruptors are more attractive to us as investors and that’s where we’re spending our time,” Sammons said in an interview.

Matt Leeds, a former partner at L Catterton, formed Forward Consumer Partners last year, and Tiffany Hagge, a former partner at BDT Capital, co-founded Citation Capital, a firm that specialises in consumer, retail, services, and industrial companies. 2019 saw the founding of Stride Consumer Partners by a few former Castanea Partners employees and the establishment of the consumer-focused private equity company Bansk Group by former executives of Reckitt Benckiser and private equity veterans.

Neda Daneshzadeh, a former partner at L Catterton, co-founded Prelude Growth Partners in 2017. In order to invest in food companies, a former Vista and KKR investor founded Butterfly Equity in 2016.

Do Buyout Companies Still See Needs for Investments?

Some big businesses continue to be active consumer investors. Dealogic lists Sycamore Partners, which oversees $10 billion in assets, and Ares, which oversees $419 billion, as two of the top 5 retail investors from the previous year.

Two additional well-known brands, TSG Consumer Partners, whose holdings include Corepower Yoga and Super Star Car Wash, and L Catterton, which was founded in 1989 and is supported by Louis Vuitton Moet Hennessy (LVMH), are still exclusively focused on consumer investing.

Investors stated that consumer services companies, with more consistent income streams from membership- or subscription-based models, can benefit more from the leveraged buyout (LBO) model. Sponsors continue to find appealing opportunities in fragmented areas like residential services, car washes, and medical spas.

TSG made investments in Radiance Holdings, a medical spa company, home solar startup Trinity Solar, and The Wrench Group, a residential services company, in 2022. In 2022, L Catterton purchased the residential services platform LTP Home Services Group.

What Does American Consumer Investing Hold For The Future?

The majority of the GDP in the United States is still derived from consumer spending, which offers chances for investors.

The United States, the largest consumer market in the world, continues to draw the attention of certain sizable foreign investment businesses as a place to make investments. For example, the European private equity company PAI Partners has increased its investments in American consumer goods companies recently and has begun assembling a team dedicated to North American investment. It acquired the US-based pet food producer Alphia last year.

“Even before we opened our US office, PAI saw that a sizable portion of our portfolio companies’ revenues were being generated in the US, given the scale and transatlantic nature of our investments. And food & consumer has always been a big part of our portfolio. We’ve raised a larger fund and the US is a large market,” said Winston Song, who leads PAI’s consumer investments in North America, in an interview.

(Adapted from Reuters.com)

Categories: Economy & Finance, Entrepreneurship, Strategy