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.
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.
Are there categories that look especially attractive to you?
BURNS: I think plant based is here to stay. But you got to be careful. I wouldn’t want to get into the plant-based meat business because I think that’s a little crazy. But I think [for] plant based, we would look at snacking, confection, the right frozen assets. Again, taking sleepy categories that potentially need some innovation. Those are the things we’ve got to look at.
It’s hard to find really good assets in an environment that’s got so much stuff they can’t control that’s making money and scaling right now. It’s hard. … There are some really good businesses up there on the [Expo East] floor that if they got the right operating excellence, and discipline and focus, they could probably get to $50 [million] or $100 million [in sales]. We’re trying to find those and partner with those founders that can do that.
What are you seeing with companies at Expo East? Do you notice any claims or similarities among the businesses?
BURNS: Unfortunately, I think it’s a lot of the same thing. I mean, I don’t know how many kombuchas you can have. I don’t know how many popcorns you can have, how many plant-based chicken nugget businesses you can have. But in those categories, there’s somebody that’s going to break out and potentially do really well. For us as investors, you have to find out which one that really is and how you can grow it and scale it.
Your newest fund has a couple hundred million dollars to put to work. How is it going so far?
BURNS: In our second fund, we haven’t made an investment. We’ve been sitting on capital for a little bit of time. And we’re looking for the right businesses to become involved with. We’re close on a few. We’re in diligence on some that I can’t talk about. But you know, it takes you a long time to find those. We’re looking for the next Kodiak Cakes, the next Justin’s, the next Vital Farms. How do you find those? They’re out there. But you just got to be super patient and do a whole lot of work.
Is there anything you’ve learned from the Great Recession or 9/11 that you’ve been able to apply in today’s environment? Does it force you to be more cautious?
BURNS: You got to be more financially disciplined, and you got to be more patient. I’ll give you an example: One Bar, which we sold to Hershey; Justin’s, which we sold to Hormel, I was CEO of both of those businesses. From the time we got there to the time we sold them was three years. Both of those businesses were three years each, and there was a ramp from $30 million [in sales] to $100 million.
That’s going to be harder in today’s environment. To do so, you got to be more patient. You can focus more on profitability. You got to focus more on a good, solid co-manufacturing partner, your input costs. You’ve just got to be better at everything you’re doing. And that requires harder work, patience and discipline. Whereas you didn’t necessarily have to have all those things when the environment — the economy — was crazy, and there’s free money. Today you do. Customers have less to spend now than before. I’m competing now with everybody else to try to get your dollar.
It’s okay to be patient and have nice growth. Big CPGs grow at 1%, 2% a year. There’s nothing wrong with a private company going, ‘Hey, listen, I’m gonna grow 20%.’ Twenty percent is a good number. Twenty percent two years ago, it’s like, eh, we need a little more. I need a 40 or 50 to get really excited. Those days are gone.
Source: fooddive.com