Opportunistic midmarket private-equity firms are circling distressed food-and-beverage companies that face liquidity challenges amid the coronavirus pandemic, looking for ways to capitalize on an industry that has been strained by shutdowns.
Some firms with less capital to invest seek to take advantage of the situation by acquiring minority stakes in larger companies stressed out by the economic effects of the pandemic. These companies include manufacturers and processors of food and beverages, whose customers–including restaurants, fast-food outlets, catering units and bars–have shut down because of the pandemic.
These buyers see a chance to acquire stakes in well-run companies whose valuations have been depressed as they struggle to cope with extreme dislocations in their markets.
Some firms may see an opportunity analogous to the one in the aftermath of the financial crisis and recession of a decade ago. In 2010, private-equity firms invested $12 billion in 91 food-and-beverage deals globally, Dealogic data show. In the following year, deal volume in the sector fell to 71 transactions worth $1.82 billion.
The current market view is that a sharp economic downturn is beginning and will be deep, but it will be followed by a faster rebound, said Michael Butler, chairman and chief executive of Seattle-based midmarket investment bank Cascadia Capital LLC.
“If we can help good companies currently witnessing liquidity crashes, we can make a good return on that investment,” Mr. Butler said, delineating the view of these midmarket investment firms.
These firms see minority investments as a way to buy a piece of businesses that they can’t afford to acquire outright, Mr. Butler said.
Middle-market firms typically make control investments in companies worth $300 million to $400 million. Acquiring a minority stake in a business that commands a $600 million to $700 million price tag provides a foothold in an enterprise that is otherwise out of reach to these investors.
There is a sense of urgency for such deals among these private-equity firms, who view the current situation as a multimonth crisis, not a multiyear event, Mr. Butler said.
“They’re not waiting, thinking that prices are going to get a lot cheaper” later on, Mr. Butler said. Firms are looking for opportunities and reviewing some, but no deals have closed yet.
Midmarket private-equity firms are also exploring using convertible preferred equity, or securities that can be exchanged for common stock, cash or other instruments, for the investments, and some with stable portfolios and enough dry powder are reviewing paying cash for full control now and refinancing deals when the market situation improves, according to a person who advises consumer-focused private-equity firms.
“Several private-equity firms have enough dry powder for rescue situations, and some are seeking amendments to limited partner agreements to allow for opportunistic minority investments,” David Fann, vice chairman at New York investment advisory and research firm Aksia LLC, said of midmarket firms. Typically, investor agreements specify an investment strategy to be pursued by a fund and can include a lot of caveats and limits.
However, food businesses with strong underlying financial positions may find it hard to part with some equity at a crisis-depressed valuation, according to the person who advises consumer-focused private-equity firms.
“These conversations will become richer depending on the length and breadth of the crisis,” the person said.
The consumer food-and-beverage sector has long been a focus of private-equity investment activity. Last year, buyout firms invested almost $9.25 billion in 83 deals involving such companies globally, according to Dealogic. In this year’s first quarter,16 food-and-beverage deals were announced.
Gregory Purcell, chairman and chief executive of food-focused private-equity firm Arbor Investments in Chicago, cautions those drawn to the sector.
“Given the uncertain environment, the nuance-laden food industry is misperceived as a safe harbor to private-equity investors,” he said.
He added that during previous downturns, inexperienced investors flocked to food and beverage deals in the hopes of making a quick buck.
“The results by generalist investors are subpar,” Mr. Purcell said.
Would-be investors should also factor in potentially lasting changes in consumer behavior as a result of the current upheaval, said Timothy Tully, president of Boston-based consumer-focused investment bank Tully & Holland Inc. Alterations in such areas as distribution channels could be substantial, he said.
“Consumers are being pushed into becoming familiar with home delivery and online shopping. That wasn’t the case two months ago and will have a longer-term impact,” Mr. Tully said.