James Gelfer October 08, 2013
PitchBook recently interviewed Michael Connor, the director of investments at Colorado-based Consolidated Investment Group (CIG), for the 4Q 2013 Private Equity Breakdown Report. CIG executes investments in a variety of areas but concentrates most of its private equity transactions in the food and beverage space. In this interview, we discuss the evolution of the direct investing strategy and current trends in the food and beverage space.
Q: What are some of the advantages and disadvantages to direct investing? Why is it growing in popularity?
A: We are seeing direct private-equity investing as a growing trend for the investment arm of many family offices. Driving this trend has been a back-to-basics approach of understanding where firms can leverage the skills and experience of their people to drive excess return on invested capital. Successful entrepreneurs have learned they can apply the vision, skills, experience and management that made them successful as business operators to direct investments. This knowledge gives them a competitive edge and can add value to the business other than just writing an equity check. Family offices are also drawn to the idea that they have more insight and control over the outcome of an investment than they would if they just invested that money with an outside private equity fund.
The disadvantages for new entrants to direct investing are the time it takes to establish a presence in the market place and gaining access to quality deal flow. Once those obstacles are overcome we believe there is a competitive advantage we have over other PE investors who lack that combination of proven entrepreneurial approach and operational expertise.
What trends are investors currently capitalizing on in the consumer/food industry?
The trends that are interesting to us are those that have longer term sustainability and appeal to the newer generation of family households. Those households are focused on affordable “better for you” food products that are fresh, less processed and easily prepared at home or eaten on the run. Ethnic food categories are also interesting given the changing demographic in the U.S. and the expansion of the American taste palate through new spices, tastes and textures. It’s not fully ethnic, but American fusion, Korean BBQ glaze on meat or Indian spiced lentil, for example.
Do you see the growth of the healthy food category as a fad or a secular trend for investing in the space?
As discussed previously, we believe the healthy food category is more a secular trend than it is a fad. For our firm, the challenge is identifying products that have lasting power with the majority of American consumers. Eating habits such as integrating whole grains, high fiber and natural ingredients in daily diets are trends that started in major metropolitan cities, but have begun to spread across the country. More niche products, such as chia seed, may be effective products but have less chance of penetrating a larger market.
The beverage space has exploded this year in terms of PE deals. What do you think is driving this?
The big players in the beverage space have been in M&A mode for quite some time. There are so many deals that have taken place on a large scale that it’s difficult to list them all here. AB InBev, Heineken and Constellation Brands have all made acquisitions in the last few years, just to name a few.
Innovation has also been driving acquisitions. The larger players have continued to look for exciting ideas that they can easily put on their platform. Carbonated soft drink sales have been anemic in the U.S., so the large players are looking toward beverages that are functional, better for you or perceived as healthier. On the alcoholic side, there are the craft trends and micro-distillery trends that are driving innovation as well.
In addition, the cash flow generated by good-sized beverage companies typically provide immediate benefit to the acquirer, especially when operating synergies and immediate access to increased distribution are taken into account. Finally, large deals have set big multiples in the space and successful exits usually attract other players.
Michael Connor is responsible for overall management, strategy and asset allocation of Consolidated Investment Group’s diversified billion-dollar investment portfolio. Connor has more than 25 years of experience managing, building and restructuring operating businesses and investment portfolios. Previously, he was treasurer for Vulcan, Inc., the investment management company founded by billionaire investor and philanthropist Paul Allen.