How one private equity firm is adapting its strategy in today’s volatile environment

After more than a decade where fledgling upstarts in the food and beverage space have had easy access to capital and investors were eager to put their cash to work in exchange for the promise of outsized returns, the dynamics have suddenly changed, according to Peter Burns, a managing partner at Sunrise Strategic Partners.

Global wars, political unrest in the U.S., supply chain challenges, rising interest rates and inflation have coalesced to affect valuations and impact who gets much-needed cash they may need to grow their businesses or even survive. While Burns said there is plenty of money still looking for a home, investors are taking a more cautious approach — prioritizing profitable, established brands and realizing it might take longer to monetize their investment now than just a few years ago.

Sunrise Strategic Partners, which describes itself as an accelerator of emerging brands in the healthy, active and sustainable living space, has invested in several big-name companies in the food and beverage sector throughout its history.

The private equity firm has exited investments in recent years in companies such as pasture-raised egg company Vital Farms and whole grain food maker Kodiak Cakes. For his part, Burns has overseen the investment in and eventual sale of five companies totaling $1.4 billion in value during his career, including Justin’s Nut Butter to Hormel Foods and One Bars to Hershey — both of which he was CEO of when they were sold.

Burns spoke with Food Dive recently on the sidelines of the Natural Products Expo East in September about how the business climate has changed and what that means for young businesses and investors like Sunrise.

Editor’s note: This interview has been edited for brevity and clarity.

FOOD DIVE: What are you seeing in the marketplace for investors?

PETER BURNS: I will tell you that I don’t think I’ve ever seen a more challenging time with all the things that you can’t control. … So from an investor standpoint, it’s going to be harder to find good businesses that can scale in this environment. This industry has had a 15, 20-year run, where [there is] innovation, lots of companies, acquisitions, growth, right? It’s had that run, and now it feels like that’s changing due to a variety of different things. A lot of the smaller businesses, you didn’t have to worry so much about profitability because they had unlimited funding or places to line up financing, that now is becoming a real consideration.

If you’re a brand or a business that has angel funding or friends and family, or you’re one of the lucky ones that’s got profitability, you can ride this out. What I know will happen is there are going to be brands that don’t have that ability. And unfortunately, there’s going to be a lot of folks that don’t make it, sadly.

Peter Burns, Sunrise Strategic Partners

Permission granted by Sunrise Strategic Partners

 

Some folks are going to feel the pain. Some folks are going to think that they can ride through it and won’t be able to. So much has to go right to exit the business at the right time for the right value. And everybody’s been spoiled by some of those past deals in history. I’ve benefited from those as well. But now times are going to be different.

Are you more or less likely to do a deal in the current environment?

BURNS: We have the capital to spend, but more so than ever, we’re going to do the right diligence against the right businesses. We’re going to focus less on explosive growth, more on the ability to get to profitability. … They have to be close to breakeven, losing a little bit of money is okay.

But we have to have the vision of where we can take it and have that be real. As opposed to, “I’m doing $30 million [in sales]. I’m losing $10 million. So when you guys come in, you’re going to be able to fix all that.” We’re good investors. We’re good operators. We have a good operating background, but we can’t make magic.

What kind of businesses are you looking to invest in?

BURNS: We like big categories that you can go in with points of differentiation and potentially some IP and create some magic that way. … Our sweet spot is food and beverage. So probably not pet care, probably not beauty. We’re looking at more established brands with real proofs of concept that have profitability — that is where we want to go.

Source: fooddive.com

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