Every private equity firm has a unique set of parameters they use to measure a prospective company’s potential value to joining their existing portfolio. While their specific parameters may be different, most of them center on a few key areas, including:
- EBITDA measurements
- Majority ownership capability
- Existing, quality management
- Strategic add-on acquisitions
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 identify their firm’s basic transaction parameters and what they look for before bringing a new company into their portfolio.
What are your basic transaction parameters?
AUA: Obviously, we have a strong bias for food and beverage in the U.S., $5 million to $30 million in EBITDA, revenue of $50 million plus. We are very focused on better-for-you, healthier foods, cleaner labels or other opportunities in the traditional food space where we can go in and make an impact through some of the ESG initiatives I mentioned. We’re definitely not a turnaround shop, but we see ESG-related initiatives as low hanging fruit that could yield huge opportunities for growth. We are mainly control players, but we will do some deals with a minority ownership as long as we have a pathway to control during the hold period. Our demographic overlay, as I said earlier, is very important, where we will only invest in family run businesses or Hispanic-oriented businesses – where we see a lot of opportunity. Most of the deals we have done have been both family and Hispanic, but they can be either/or.
Baker Tilly Capital: Have you started looking at Asian foods?
AUA: Yes, we have looked at all types of multicultural foods and we think there’s several good opportunities in the Asian food category. We’ve actually looked at a couple Asian dessert companies that, for one reason or another, didn’t cross the bar for us. It’s an area we continue to focus time on, from frozen entrees to as I mentioned, desserts.
Benford: Specific criteria include businesses with typically at least $5 million in revenue and $1 million in EBITDA and more. For add-on acquisitions, any size as long as the fit makes sense, we’re flexible on that. We’re long-term, buy and hold, buy and build investors. We’re also investing our own capital in each deal, so we’re a little different from other firms. We have the advantage of that flexibility and time on our side as far as growing and becoming more successful. We think in much longer time increments.
Baker Tilly Capital: Do you see anything changing in the next 5 years or because of your time horizon are you going to keep sawing wood in food and beverage? One of the pieces of data I saw that I thought was fascinating was that of the 150 food transactions by private equity firms from 2012 to 2016, there were 120 unique investment groups. No one group did more than two – three unique deals.
Benford: We don’t see changes that would deter our interest in the food category. We will continue to focus on buying quality, stable food businesses and working to build them over time. Whatever the latest trends or fads are in food – we aren’t focused on those kinds of businesses. The businesses we’re interested in buying tend to be in niches and, in many cases, they’ve been around for a long time. Having said that, there are trends that support our growth and product development strategy. For example, one of our strategies in new product development is organic. As you mentioned earlier, the organic category is growing faster than traditional food. We are also benefitting from growth trends around ethnic food and single-serve.
Baker Tilly Capital: In general, are you trying to gap-fill where you see gaps and you think there’s opportunities or are you more opportunistic in terms of deal flow?
Benford: We are focused on niche products within the produce section because that aligns with our hard-shell dip product line. Acquisitions that are complementary with that distribution make a lot of sense for us. In that sense, we’re targeted. In the baking aisle and other sections of the store, I would say it’s more opportunistic.
I appreciate the opportunity. It’s early days for us in the food category, but we’re really excited about Saco and thrilled to be partners with this management team. Over the next 10 years or so we think we can build a much bigger business via organic growth and add-on acquisitions.
Keystone: First a quick word on our transaction philosophy: we take each investment personally, investing our own capital rather than being beholden to outside investors. As such, we do not have a short-term outlook, but instead, are in it for the long-haul exercising the patience and dedication needed to build highly successful companies. We ideally look to partner with existing management, acquiring a majority stake in the company but ensuring that key leaders have meaningful equity ownership or other incentives to fully align interests. As for parameters, we traditionally look at businesses doing $4 million in profit and up for new platform acquisitions, and as small as $1 million in profit for add-ons to existing platforms. We are open-minded in terms of industry, but have a current disposition towards new investments in food products/ingredients/testing, architecture and engineering services, professional services, marketing services/technology, and healthcare products/services, not to mention our concerted effort to make strategic add-on acquisitions across our existing portfolio of businesses.
Riverside: Our transaction parameters are as follows: (a) companies with EBITDA of $3 million to $35 million, (b) majority controlled equity investments, and (c) strong management with proven ability to execute a defined strategic plan.
For more information on this topic, or to learn how Baker Tilly Capital specialists can help, contact our team.