Back in the summer of 2020, we produced a report to investigate the impact of covid-19 on the appetite for consumer assets among private equity funds. Our findings then, highlighted cautious optimism in investing in the broad consumer sectors. Investment Directors and CEOs were also pleased with the performance of their executive teams as they navigated their way through, what could only be described as, an unprecedented crisis.
Five years on, we were keen to revisit the topic to understand current private equity appetite for consumer sectors – especially given a whole host of new macroeconomic and geopolitical challenges that have hindered elements of the sector’s ability to fully recover post-pandemic.
Over the past few months, The MBS Group has conducted interviews with dozens of private funds throughout Europe, as well as portfolio Chairs and CEOs to gain a deeper understanding of this sentiment. Based on these discussions, we are pleased to present our latest research, which provides a detailed snapshot of private equity’s appetite for the consumer-facing sector.
“If we were to make a substantial consumer investment right now, we would put off about half the people we’re talking to about putting money into the fund.”
Our conversations confirm that, although there is some appetite for private equity funds to invest in the consumer sectors, appetite for new consumer investments remains muted – and the consumer sectors are not high priority among generalist private equity funds. Our key findings showed that:
• The resilience of consumer spending, and the ultimate performance of consumer assets, is, arguably, being under-priced by private equity funds
• Different and new private equity investors are entering the European market, including several US funds which previously hadn’t made investments in the region
• There are no clear sub-sectors of consumer that are of particular interest across different PE funds; some sectors, such as hospitality and fashion have, however, been deprioritised
• Longer holds and slower exit routes are changing the way private equity funds are thinking about portfolio leadership in consumer assets
Through our conversations, we found that two-thirds of funds were either ‘likely’ or ‘very likely’ to invest in the consumer-facing sector in the next 12 months while not a single fund we spoke to said they would be ‘very unlikely’ to do so, compared to 3% in 2020.
However, funds are wary of making investments, with our analysis suggesting that there was actually greater interest in making consumer investments in 2020 than today – partly due to pressure from Limited Partners (the investors themselves in PE funds) for generalist funds. One Managing Partner and former industry CEO and Chair told us: “We will make future [consumer] investments with great caution. If we were to make a substantial consumer investment right now, we would put off about half the people we’re talking to about putting money into the fund.”
Consumer spending has also had a significant impact on recent nervousness with the cost-of-living crisis reducing the amount of disposable income. However, it does seem to have had a revival, with one Partner explaining that they were less likely to invest in value propositions: “Most middle and higher income consumers entered into this period with very robust balance sheets – with record levels of saving and excess cash.” The lowest income consumers, ‘will be squeezed the most’ but generally there has been an uptick in consumers’ ability to spend.
When looking at consumer sub-sectors, health, wellness, beauty and luxury were seen as slightly more desirable for potential investors, with gaming also seen as an area of interest, while hospitality, travel and leisure, and retail have been deprioritised.
However, the overall investment strategy has changed with funds less driven by specific sectors or directly investing in consumer trends. A PE fund Partner explained: “We’re much more focused on zooming in on sub-niches, which we feel we understand, rather than having a broad lens on consumer.” Often, this has meant coming up with bold investment hypotheses. For example, as one Managing Partner told us using a telco example, rather than hedging their bets and backing one of many rapidly expanding fibre optic networks, it’d be better to invest in makers of the fibre optic itself – and this is a philosophy they are now seeking to apply across their portfolio.
“The lowest income consumers, ‘will be squeezed the most’ but generally there has been an uptick in consumers’ ability to spend.”
The changing landscape has also meant that private equity dealmakers are looking for greater stability in their leadership teams. One Managing Partner told us, “As a general rule, we avoid investments where a lot of the team have got to be changed.” As such, given longer-term holds are now becoming more common place than before, private equity firms are needing to think more about succession-planning mid-cycle. Consequently, we are likely to see the influence of Operating Partners increase, and CEOs and CFOs of consumer-facing assets, who have now been in role longer than expected looking to step out in the coming period. As one Chair told me: “When I took on this role I was 64, I am now 73 – and my CEO has been in place for nine years. When he came in, I was told it would be a three-year gig, max four years. Clearly I need to retire, and we need to refresh the CEO before we consider an exit”.
Our full report can be found here. From our findings, it is clear that there is some optimism from PE funds towards consumer assets, even if it is cautious. Our sense is that in the coming period, private equity funds will continue to watch the landscape gradually evolve and change as the consumer-facing sectors continue to navigate the post-covid challenges.
We hope our full report provides an informative overview of the outlook, challenges and opportunities for private equity funds in the consumer-facing sector and your feedback and insights would, of course, be most welcome.
