By Abigail Summerville
NEW YORK (Reuters) – Private equity firms made billions of dollars betting on major U.S. retailers, clothing and accessories and restaurant chains, reshaping the consumer sector from the 1990s to the early 2010s. But over the past 10 years the big firms, including Carlyle and Warburg Pincus, collectively pulled back on investing in the sector, reflecting changing consumer tastes and competition from corporate buyers and family offices.
Investments in retail and consumer companies accounted for just 7% of the total U.S. private equity deal volume of $2.6 trillion in the last decade compared to nearly 15% of the total volume of $1.7 trillion in the prior decade, according to Dealogic data.
Street wear business Supreme, McDonald’s China, discount retailer Dollar General, and crafts retailer Michaels were big winners for private equity firms like Carlyle, Bain, Blackstone, and others, which “exited,” or sold, their stakes at handsome profits during the last decade.
The upshot for the sector is a scramble among new-age investment firms to fill the void left by the larger firms. Large consumer names like Unilever and L’Oreal are also increasingly winning deals for smaller peers, as they face less competition from private equity on price.
Here is why private equity firms are no longer making big bets on the sector.
WHICH LARGE FIRMS HAVE STOPPED MAKING CONSUMER INVESTMENTS?
Apart from Carlyle, Warburg Pincus, THL Partners, and Centerbridge Partners are not actively scouting for potential consumer and retail (C&R) targets.
Last year, Carlyle told its staff in an internal memo that it would pull back from investing in U.S.-based consumer and retail companies, as the sector was no longer core to its buyout strategy. Carlyle blamed “increasingly challenging investment trends in this space” for its decision.
Warburg Pincus stopped investing in US C&R companies five years ago to focus on opportunities in other sectors, according to a person familiar with the matter. THL’s C&R team is now increasingly covering technology and business services, and the firm has not made a single consumer investment in the last six years. Centerbridge shifted its focus to branded industrial companies about five years ago, according to a second source familiar with the firm’s strategy.
WHY ARE FIRMS CUTTING BACK ON THEIR INVESTMENTS IN CONSUMER COMPANIES?
The pullback can be partly blamed on the COVID-19 pandemic, coupled with a tough macroeconomic environment that hurt consumer products businesses over the past few years.
The pandemic disrupted supply chains all the over the world in 2020 and the consumer goods industry has struggled to regain its footing.
Market volatility and high interest rates over the past two years further compounded the woes of consumer goods businesses.
WHY IS INVESTING IN THE SECTOR CHALLENGING AT A LARGE SCALE?
The success of the private equity business model is built around bets in industries that are stable, generate predictable cash flows, and are essentially recession-proof.
Consumer goods companies, which have traditionally been able to withstand bouts of market volatility, are now increasingly vulnerable.
The explosive growth of e-commerce over the past decade has also driven a generational shift in consumer behavior, as shoppers increasingly prefer online channels like Amazon, resulting in lower footfall at brick-and-mortar retailers like Macy’s and Kohl’s.
The barriers for entry in the sector have also come down significantly. Popular consumer brands are increasingly being launched online by entrepreneurs or social media celebrities – such brands are often able to scale cheaply, without having to spend heavily on advertising.
However, customer acquisition costs remain high since it can be challenging to turn an average consumer into a loyal shopper.
Those industry dynamics have forced investment committees to rethink their strategy on large consumer bets. Moreover, as private equity funds have witnessed explosive growth, large firms have needed to deploy bigger chunks of capital for each investment. The scarcity in volume of large, high-quality consumer goods makers and retailers has forced investors to turn to other industries.
ARE LARGE FIRMS FACING INCREASED COMPETITION FOR THE BEST COMPANIES?
Over the past 12 months, financial sponsors competed against well-capitalized consumer giants amid a tough environment for debt financing, which forced private equity firms to be more conservative.
For instance, Unilever beat out large investment firms to acquire haircare brand K18 and frozen yogurt brand Yasso; L’Oreal won the auction for luxury cosmetics brand Aesop; and Mars prevailed over private equity firms in its pursuit of healthy-meals maker Kevin’s Natural Foods.
Competition from family offices has hurt private equity prospects too. For example, Redwood Holdings, the family office set up by billionaire staffing industry veteran Jim Davis, acquired Newly Weds Foods last year for about $4 billion – one of the largest buyouts of a consumer business in 2023.
WHO IS FILLING THE VOID LEFT BY PRIVATE EQUITY FIRMS?
A new wave of middle-market and growth-equity investment firms are targeting small-scale consumer and retail companies to fill the gap left by large sponsors.
Carlyle’s former C&R head Jay Sammons left the firm in 2022 to start SKKY Partners with Kim Kardashian. SKKY, which focuses on consumer and media investments, announced its first deal last year with a minority investment in condiments brand 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.
Last year, ex-L Catterton partner Matt Leeds launched Forward Consumer Partners, while ex-BDT Capital partner Tiffany Hagge co-founded Citation Capital, which focuses on consumer, retail, services and industrial companies. In 2019, some Castanea Partners veterans launched Stride Consumer Partners and former Reckitt Benckiser executives along with private equity veterans launched the consumer-focused private equity firm Bansk Group.
In 2017, a former L Catterton partner Neda Daneshzadeh co-founded Prelude Growth Partners. In 2016, a former KKR investor and former Vista investor launched Butterfly Equity to invest in food companies.
DO BUYOUT FIRMS STILL SEE INVESTMENT OPPORTUNITIES?
Some large firms are still prolific consumer investors. Sycamore Partners, which manages $10 billion of assets, and Ares, which manages $419 billion, were among the top 5 retail investors last year, according to Dealogic.
Two other well-known names remain solely focused on consumer investing: L Catterton, which launched in 1989 and is backed by Louis Vuitton Moet Hennessy (LVMH), and TSG Consumer Partners, whose investments include Corepower Yoga and Super Star Car Wash.
Investors said the leveraged buyout (LBO) math can work better for consumer services companies, which have more predictable revenue streams from subscription or membership-based models. Fragmented industries such as car wash, medical spa, and residential services remain attractive opportunities for sponsors.
TSG invested in residential solar company Trinity Solar last year, medical spa firm Radiance Holdings, and residential services firm The Wrench Group in 2022. L Catterton acquired LTP Home Services Group, a residential services platform, in 2022.
WHAT IS THE FUTURE OF CONSUMER INVESTING IN THE UNITED STATES?
Consumer spending still accounts for a majority of U.S. gross domestic product (GDP), thus presenting opportunities for investors.
Some large overseas investment firms still view the U.S. – the world’s biggest consumer market – as an attractive investment destination. For instance, Europe-based private equity firm PAI Partners has in recent years ramped up bets on U.S. consumer goods companies, and started building out a team focused on investing in North America. Last year, it bought US-based pet food manufacturer Alphia.
“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.
(Reporting by Abigail Summerville in New York; Editing by Anirban Sen, Vanessa O’Connell and Chizu Nomiyama)