Private equity buys into the ‘better-for-you’ food sector

Thanks to market fluctuations and an inscrutable post-pandemic economy, the current climate has been tough for private equity, and many buyout shops, including the heavyweights, are failing to meet fundraising targets.

Yet, amid these challenges, certain recession-resistant sectors have emerged as havens for risk-averse dealmakers. One of these is the organic, healthy food and nutrition space, a specialty niche that gained momentum during lockdown, when more consumers turned to healthier and more sustainable food diets. According to one study, the market is set to pull in $620 billion by 2026. Small wonder that PE has been betting on this sector.

There have been bumps. Inflation and recent supply-chain disruptions wreaked havoc. Some firms have had to increase their due diligence in the face of market challenges, while others struggled to secure funding for deals.

“[The Healthy Lunch Box allows] children to continue to eat nutritious meals in an educational setting” 

Colleen Gurda,
Riveter Capital

However, even with these setbacks, deal volume in the healthy food and nutrition sector continues to be brisk in the post-covid era. Examples include Butterfly Equity’s acquisition of Milk Specialties, a maker of nutrition products, and Riverside Company taking a controlling stake in BioDue, an Italian manufacturer of supplements.

Consider the following: in 2021, when covid restrictions were still in place, the capital raised from agribusiness-related funds, which also invested in the food and nutrition sector, soared to a whopping $7.3 billion, as per PEI research. That number markedly dipped in 2022 to $4.8 billion, a drop that can be likely attributed to inflation and supply-chain woes caused by the pandemic. As of May 2023, the number totaled nearly $2 billion, a promising sign indicating that full-year numbers will equal or surpass last year’s.

In the past few months, Buyouts tracked myriad deals in this space within the past year and spoke to several PE professionals about their investments. Although none were forthcoming with the financial terms of their respective deals, all expressed great enthusiasm for the “better-for-you” food niche, citing the allure of its inherent resilience, fragmentation and unharvested growth potential.

Panama Banana and other portfolio prizes

This was the case for Wind Point Capital when it purchased FreshEdge, an Indianapolis-based distributor of fresh foods, in October last year. The deal materialized after Wind Point found out that FreshEdge, which had been backed by Rotunda Capital Partners, was seeking a new private equity partner. As an active investor in the food and distribution space, the Chicago-based mid-market buyout shop was interested.

$620bn

Estimated size of the organic, healthy food and nutrition market by 2026

“We like the specialty produce distribution space,” says Joe Lawler, managing director at Wind Point Partners, and deal lead. “It sits at the intersection of two industries where Wind Point has expertise and demonstrated success: distribution and food. Further, the FreshEdge strategy is one we have a ton of familiarity with where we’re buying fundamentally good businesses, investing in people, processes and completing strategic add-on acquisitions. The result is to really transform the company over the course of the investment.”

The FreshEdge deal came from Wind Point’s 10th fund, which is in market targeting $1.7 billion, and had raised about $1.1 billion as of January 2022.

“We wanted to expand our presence” 

Sarah Abdel-Razek,
Riveter  

Market challenges notwithstanding, Lawler insisted that FreshEdge was able to navigate them due to the strength of the company’s management, solid relationships with both customers and suppliers and high-quality products.

Last May, Wind Point scored a milestone for FreshEdge when it acquired its first add-on, Panama Banana, a Chicago-based distributor of fine produce. For Wind Point, this was a natural progression in FreshEdge’s growth trajectory. And in late July, Wind Point scooped up Sirna & Sons, an Ohio-based whole produce distributor, as another add-on for the platform.

Says Lawler: “We want to be a good acquirer for other family and entrepreneur-owned businesses who we think would be a great fit as part of the FreshEdge family.”

Healthy Lunch Box, school nutrition programs

Riveter Capital was also looking for an add-on acquisition for one of its portfolio companies, which in this instance was The Healthy Lunch Box, a Houston-based provider of homemade healthy food to schools and daycare centers, when Twelve Oaks Catering came onto its radar.  

$4.8bn

Capital raised from agribusiness-related funds, which also invested in the food and nutrition sector, in 2022

Similar to The Healthy Lunch Box, which the women-owned PE firm acquired in 2021, Twelve Oaks provides cafeteria-style and individually packaged meals to schools and daycares in the Dallas area. Twelve Oaks emphasizes using simple, traditional cooking methods to prepare nutritious menu items from scratch and, like the Healthy Lunch Box, is a Texas Department of Agriculture and US Department of Agriculture-approved commodity processor. 

“Our initial focus once we closed the acquisition of The Healthy Lunch Box was to significantly increase our market share in Houston. Once we achieved that, we began looking for other similar businesses in Texas,” says Sarah Abdel-Razek, Riveter co-founder and partner. “We wanted to expand our presence beyond Houston and apply the same playbook to organically grow another company in a short time period.”

After considerable research, Riveter – which invests in lower-mid-market businesses owned by women and minorities – set its sights on Twelve Oaks.

As Abdel-Razek tells Buyouts, Riveter liked Twelve Oaks’ established presence and reputation in the Dallas area. Plus, the fact that she and fellow co-founder and partner Colleen Gurda are mothers, made Twelve Oaks (and before it, The Healthy Lunch Box) even more appealing.

Despite Twelve Oaks not being on the market, Riveter reached out to Jonathan Jones, former owner and current general manager of the business. Talks began in December 2022. Three months later, a deal was inked.

“We want to be a good acquirer for other family and entrepreneur-owned businesses” 

Joe Lawler,
Wind Point Partners 

Deviating from other firms, Riveter does not have a traditional fundraising model. Rather, the buyout shop raises funds on a deal-by-deal basis, which was the case for the Twelve Oaks acquisition.

With both The Healthy Lunch Box and Twelve Oaks participating in federally funded programs that enable children in underserved communities to receive free meals, inflation was not an issue.

“Since our investment [in The Healthy Lunch Box] about two years ago now, we’ve seen the government acknowledge the inflationary environment and as such, increase funding for these programs,” says Gurda. “[This allows] children to continue to eat nutritious meals in an educational setting.”

‘People, plants and animals’

MidOcean Partners is another PE firm with a strong affinity for the better-for-you food and nutrition space. With its June 2023 buyout of QualiTech, a Chaska, Minnesota-based developer of ingredients and nutrients “that promote the health and wellbeing of people, plants, and animals,” the New York mid-market buyout shop wanted to get a little more granular in its investment strategy.

“It really gives us a new platform in the broader supply chain that touches multiple segments, such as actual functional ingredients, which go to the farmer and the agronomist,” explains Steven Loeffler, a principal at MidOcean, who spearheaded the deal. “It gets deeper into the value-add supply chain and gives us an opportunity to consolidate these end markets.”

Though it may seem counterintuitive given recent disruptions and market gyrations, leveraging aspects of the healthy food and nutrition supply chain can be an effective tactic for PE firms looking to snap up attractive targets in this sector.

“For branded businesses, scaling in a profitable way while maintaining an attractive growth trajectory can be a challenge,” says Ryan Freeman, managing director at Harris Williams, a frequent adviser to deals in the better-for-you food space. “The companies that have successfully navigated supply-chain difficulties are often those with a diverse supply base and more sophisticated procurement across their vast network.”

For Loeffler, this strategy has not come without snags. “[We’re] doing more due diligence than we’ve done years ago – gauging a business’s ability to pass through prices that fluctuate and if the business can handle inflationary inputs,” he explains.

“For several years, natural and better-for-you food products have seen strong and steady growth, with many new brands emerging on the scene”

Ryan Freeman, Harris Williams

MidOcean Partners VI, which closed on $1.5 billion in March 2023, invested in the Qualitech deal.

Sports supplements and the whey of the future

Los Angeles-based Butterfly Equity is an anomaly as it’s one of a handful that targets the food space exclusively. Founded in 2016, Butterfly has cut a swath across the organic, healthy food and nutrition landscape, investing in a diverse array of companies ranging from Pacifico Aquaculture, a sustainable producer of ocean-raised striped bass, to plant protein brand Orgain. (In 2022, Butterfly sold a majority stake in Orgain to Nestlé Health Science but continues to own a minority stake).

Butterfly’s keen interest in the sports nutrition and protein segment drove its desire to scoop up Milk Specialties from American Securities last December. Based in Eden Prairie, Minnesota, Milk Specialties processes raw dairy inputs, such as milk and liquid whey, into ingredients for a variety of nutrition end markets.

“We’ve admired Milk Specialties from afar for some time,” says managing director Aaron Kirkbride when discussing the genesis and evolution of the deal, which closed this past February. “We’ve been active players in the sports nutrition industry for years, dating back to our acquisition of Orgain in 2019, and have always recognized Milk Specialties as the gold standard supplier in whey and milk protein ingredients due to its scale, quality and innovation capabilities.”

Butterfly Fund II, which racked up more than $1 billion in August 2022, coupled with its co-investment vehicle, Butterfly Nourish Co-Invest, was deployed to invest in the deal.

“We’ve been active players in the sports nutrition industry for years, dating back to our acquisition of Orgain in 2019” 

Aaron Kirkbride,
Butterfly Equity

Asked about the challenges of this transaction, Kirkbride declines to comment. He notes that: “Whey and milk protein products have demonstrated steady growth through cycles, and we believe the category is set up for continued growth going forward.”

Conversely, Riverside Company was very transparent when discussing the troubled European private equity climate that was the backdrop for the firm’s acquisition of BioDue, an Italian company that manufactures and commercializes food supplements. BioDue commenced the auction process in mid-summer 2022, when inflation was skyrocketing.

Riverside emerged as the winning bidder, sealing the deal in November 2022; the firm’s European peers weren’t so lucky with their respective dealmaking.  “It was a very difficult market environment,” says Rafael Alvarez-Novoa, a partner at Riverside’s Madrid office who co-led the deal with Damien Gaudin, a partner at the Brussels’ office. “We signed a binding SPA in the fourth quarter of last year when there was no bank financing, literally. We got the deal fully financed in record time. A lot of the deals in the fourth quarter of last year fell apart because either companies were highly impacted by the inflationary environment or the deals didn’t get financing.

“In Riverside, we have a very good set of lenders with whom we’ve already done a lot of deals. Because of that and our knowledge of this sector, we managed to get bank financing, but it was a challenge.”

“We are growing sales more than 20 percent compared to last year, which proves our investment thesis”

Rafael Alvarez-Novoa, Riverside

The supply-chain disruptions weren’t the problem, underscores Alvarez-Novoa. It was getting across to lenders that BioDue is both resilient and not consumer discretionary.

“The demand for these products is driven by a health component,” he continues. “They are supplements sold through pharmacy channels. The way it works is that consumers typically have a prescription from a doctor.” The supplements run the spectrum from probiotics to vitamins and minerals.

So far, Riverside’s bet on BioDue seems to be paying off. “We are growing sales more than 20 percent compared to last year, which proves our investment thesis,” says Alvarez-Novoa.

Riverside Europe Fund VI, which closed on €465 million in March 2021 and targets European businesses with EBITDA between €5 million and €30 million, invested in the BioDue deal. Despite current market uncertainty, the future for continued PE investing in the organic/healthy food and nutrition sector appears to be auspicious, says Harris Williams’ Freeman.

“For several years, natural and better-for-you food products have seen strong and steady growth, with many new brands emerging on the scene,” he notes. “Even in a volatile economy, the long-term consumer trends and industry tailwinds propelling this segment continue and investor opportunity endures.

Tasty Flowers

Sun Capital beefed up its food and beverage platform with the recent purchase of Fresh Origins, a microgreens and edible flowers pioneer

Earlier this year, Sun Capital generated news with its acquisition of Fresh Origins, a San Marcos, California-based grower and shipper of microgreens and edible flowers, for an undisclosed sum. Like other buyout shops investing in this space, Sun Capital was drawn to the target company’s growth and steady consumer demand. In a brief Q&A with Iris Dorbian, Matthew Garff, a senior managing director at Sun Capital, expands further on his firm’s bullishness. 

What made you want to acquire Fresh Origins? How did this deal evolve?

Fresh Origins has demonstrated consistent growth and a proven track record of success. With an established customer base that includes top restaurants and resorts, we saw the opportunity to acquire a market-leading, defensible business in a rapidly growing sector.

Why do you find this specific sector so attractive? 

The microgreens and edible flowers market has been, and is expected to going forward, grow steadily in both foodservice and in retail. Alongside Fresh Origins, Sun Capital has three other affiliated portfolio companies in the food & beverage sector: CNC, Flamingo Horticulture and Fresh-Pak.

What were the challenges of this deal?  

Operationally, this business is reasonably labor-intensive. Knowing that today’s production is located in greenhouses in Southern California, the company needs to plan carefully to manage labor costs. The current inflationary environment heightens this focus. Also, there is an initial perception that Fresh Origins is an agriculture company, which implies crop risk. However, microgreens are harvested every couple of weeks in greenhouses. This predictability, combined with dependable well water, all but eliminates the traditional crop risk seen with many agriculture businesses. We will need to make sure that future investors appreciate this when we exit the investment.  

What’s your ultimate goal with Fresh Origins?

We are focused on growing this business to meet increasing demand. We will support Fresh Origins with our operational resources and our food and beverage industry expertise.