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Private equity turns to new fundraising tactics in tough market
Private equity firms are increasingly raising money to buy individual companies on a deal-by-deal basis, as they struggle with a downturn in the market and investors look for ways to cut management fees.
A record $31bn was deployed by “deal-by-deal” investors last year, according to data provided by private equity advisory firm Triago, defying a broader dealmaking and fundraising slump in the industry.
This was more than five times the amount raised and invested in 2019. More than 700 companies were acquired by private equity in this type of deal last year, more than double the total from five years ago.
Among those offering or considering these types of deals are some of finance’s biggest names, including hedge fund Elliott, US investment giant Hamilton Lane, as well as others such as European credit firm Hayfin, said people familiar with the details.
“Barely a conversation goes by with investors who aren’t looking at, or are open to, doing deal-by-deal type investments,” said William Clegg, a partner at private equity advisory firm Colmar Capital. “It’s everyone from insurance companies, [to] sophisticated family offices and even sovereign wealth funds.”
Traditionally, private equity firms raise money from investors in a structure that locks in cash for more than a decade. This is used to buy a portfolio of companies. The firms charge management fees of between 1.5 and 2 per cent and take 20 per cent of the profits when portfolio investments are sold on. The structure means private equity executives can make good money on fees even if they have not invested their clients’ money.
However, after a decade-long industry boom, private equity groups have been struggling to sell portfolio investments and to convince investors to lock funds up for long periods with high fees attached. Including venture capital, the industry raised $803bn last year, the lowest amount since 2017.
Dealmakers have also found it hard to find attractive new deals in a higher interest rate environment, leaving them sitting on $4tn of ‘dry powder’, or uninvested client funds.
The deal-by-deal approach can be an easier sell to investors. It often means lower, more bespoke management fees, though dealmakers can demand a bigger proportion of profits when the investment is sold on. But investors also know where their money is being spent from the start of the process.
“Deal-by-deal transactions are favoured by institutional investors because they have the opportunity to cherry pick their preferred companies,” said Sunaina Sinha Haldea, head of private capital at Raymond James. “These deals typically come with lower fees than traditional fund investing.”
Investor money can also be put to work and returned more quickly than from a traditional pooled fund, which is particularly relevant in a slower market where firms are earning fees on mountains of uninvested cash.
“A lot of general partners are sitting on dry powder,” said Matt Swain, chief executive of Triago, which specialises in raising money for these types of transactions. “The [deal-by-deal] management team won’t sit on their money which is important in this environment.”
Investment banks are looking to get in on the action. In December, California-based Houlihan Lokey announced a deal to buy Triago.
The difficult fundraising market has also increased the attractiveness of deal-by-deal investing to executives who want to set up on their own.
“The primary fundraising market has been challenging for everyone including named brands, and it’s almost been closed for first-time funds,” said Andy Lund, co-head of Houlihan Lokey’s private funds group. “There has been much more activity on the deal-by-deal front.”
For dealmakers who have struck out on their own, deal-by-deal investing can help them build a record and relationships with potential investors to tap if they want to raise a fund in the future.
It’s Been 30 Years Since Food Ate Up This Much of Your Income
The last time Americans spent this much of their money on food, George H.W. Bush was in office, “Terminator 2: Judgment Day” was in theaters and C+C Music Factory was rocking the Billboard charts.
Eating continues to cost more, even as overall inflation has eased from the blistering pace consumers endured throughout much of 2022 and 2023. Prices at restaurants and other eateries were up 5.1% last month compared with January 2023, while grocery costs increased 1.2% during the same period, Labor Department data show.
Relief isn’t likely to arrive soon. Restaurant and food company executives said they are still grappling with rising labor costs and some ingredients, such as cocoa, that are only getting more expensive. Consumers, they said, will find ways to cope.
“If you look historically after periods of inflation, there’s really no period you could point to where [food] prices go back down,” said Steve Cahillane, chief executive of snack giant Kellanova, in an interview. “They tend to be sticky.”
In 1991, U.S. consumers spent 11.4% of their disposable personal income on food, according to data from the U.S. Agriculture Department. At the time, households were still dealing with steep food-price increases following an inflationary period during the 1970s.
More than three decades later, food spending has reattained that level, USDA data shows. In 2022, consumers spent 11.3% of their disposable income on food, according to the most recent USDA data available.
Many diners have said they are going out less frequently or skipping appetizers, while buying cheaper store brands more frequently at supermarkets and seeking out promotions or deals offered via apps. That is starting to chip away at some sales for food makers and restaurant operators.
Food companies said they are feeling pinched themselves. While commodities such as corn, wheat, coffee beans and chicken have gotten cheaper, prices for sugar, beef and french fries are still high or rising. Companies across the U.S. economy have also raised prices beyond covering their own higher expenses, lifting profits for industries including retail, biotech and manufacturing.
Food inflation has raised the ire of President Biden, who took to Instagram during the Super Bowl to blast food makers that he said were providing less bang for consumers’ buck—putting fewer chips in each bag or shrinking the size of ice-cream containers.
“The American public is tired of being played for suckers,” Biden said. “I’ve had enough of what they call shrinkflation. It’s a rip-off.”
David Chavern, CEO of the Consumer Brands Association, which represents major food manufacturers, said the industry offers many choices at different price points. “We hope to work with the president on real solutions that benefit consumers,” he said.
Denny’s, Wendy’s and other restaurant chains told investors this month that their guest counts fell last year compared with 2022 levels as consumers, in particular those with lower incomes, feel the financial pinch. Big food makers including Hershey and Kraft Heinz have reported that their sales volumes declined as prices rose for their products, with several reporting a hit to profits in the latest fiscal year—and others an increase.
Oreo maker Mondelez said in January it would continue raising prices on some of its products this year, largely because of cocoa prices, which earlier in February surged past a 46-year record. Hershey said this month it expects more expensive cocoa to cut into the company’s profit this year. Kraft Heinz said inflation is moderating but that its costs are still higher, driven in part by pricier tomatoes and sugar.
Restaurant chains said they are trying to operate more efficiently to help defray wage increases, but they also expect to raise prices.
Some restaurant and food companies, including Kraft Heinz, Mondelez International and Olive Garden owner Darden Restaurants, are projecting higher earnings this year. Signs of a consumer-spending slowdown has led others to temper their outlooks, with Starbucks lowering its same-store sales projection for 2024 and frozen-foods maker Conagra reducing its per-share earnings forecast.
Investors have cooled on food stocks. An S&P 500 subindex of restaurant stocks has risen 10% in the past 12 months through Wednesday’s close, while the broader index gained about 25%. An S&P subindex tracking packaged food and meat companies fell roughly 8% over that period.
Food manufacturers and restaurants have been offering more deals on some items. J.M. Smucker and Conagra have reduced prices on coffee and margarine, passing through lower costs for coffee beans and edible oils. McDonald’s and Wendy’s said they would offer deals this year aimed at consumers seeking relief from rising prices.
Gary Pilnick, chief executive of WK Kellogg, said the company has been working to market cereals such as Frosted Flakes and Froot Loops to pressured consumers. An ad campaign launched in 2022, for example, encouraged consumers to eat cereal for dinner, pitching it as an easy, inexpensive alternative that, combined with milk and fruit, costs less than $1 per serving. “Give chicken the night off,” the campaign’s tagline says.
Although it is rare for food prices to retreat, it is also unusual for prices to skyrocket as much as they have in recent years, said TD Cowen analyst Robert Moskow. He said he expects grocery prices to decline for a period this year as food makers come under pressure from consumers and retailers.
Kraft Heinz said it is focused on providing affordable options for families, and that while its costs rose 3% in 2023, it raised prices by 1%. WK Kellogg said that before raising prices, the company tries to combat higher costs through greater productivity.
This week’s fun finds
Interns, Aakanksha and Jamie, jumped on the EdgePoint Moai tradition and offered up smoked meat deli sandwiches, half turkey and half smoked meat. And for those with a sweet tooth, Mini Bombolini and Gur Shondesh (a sweet made from cottage cheese and jaggery).
Launching across the world, Foodmarks are destinations and experiences with a recipe of three key ingredients: the perfect moment, the perfect meal, and an ice-cold Coca-Cola.
To launch the campaign, Coca-Cola will debut five immersive experiences globally, each inspired by a captivating moment in culture. The debut Foodmarks will invite people to rediscover the magic created during the original moment – from the time Marilyn Monroe was photographed enjoying a hot dog and a Coca-Cola from a New York City street cart, to scenes captured in the Hong Kong film “The God of Cookery.” More than 400 Foodmarks are highlighted at launch in cities and neighborhoods around the world, with more being added over the coming weeks, brought to life through a unique partnership with Time Out.
Here are some of the debut, immersive launch experiences that fans can expect to see in 2024:
New York City, USA – February 16-17
- The first iconic Foodmark experience will debut in New York City, inspired by the famous photograph of Marilyn Monroe stopping traffic while enjoying a hot dog and an ice-cold Coca-Cola. This immersive three-day experience will create a perfect mashup of 1957 and 2024, incorporating theater, dance, technology, and style, featuring shops, breakout flash-shows, and a virtual Marilyn brought to life through AI - all inspired by 1957 Coca-Cola. Free tickets for the event have already “sold out”, however, a limited number of entries will be available at the experience on a first-come, first serve basis.
Rio de Janeiro, Brazil – March 1
- In the 80s, Brazilian rock legend Cazuza frequented the bohemian neighborhood of Leblon, enjoying many a late-night meal after a show with an ice-cold Coca-Cola. For The Cazuza Foodmark, Coca-Cola is opening “Pizzaria Cazuza” an 80s themed rock restaurant and music venue serving Cazuza’s favorite pizza and Coca-Cola.
Hong Kong, China – March 8-10
- When “The God of Cookery" came out in the 90s, it became an instant hit in Hong Kong cinema, telling the story of a renowned chef who loses his title and sets out to reclaim it, filled with scenes featuring meals and Coca-Cola. At The God of Cookery Foodmark, Coca-Cola is bringing Hong Kong's cinematic flavors to life by recreating the renowned 'Beef Ball Shop' as an immersive pop-up store.
New Delhi, India – March 8
- Raj Kapoor was the biggest star in Bollywood, and he would often share meals and Coca-Cola with his co-stars and crew on-set during the 1950s. At The Raj Kapoor Foodmark, Coca-Cola is recreating Raj Kapoor’s on-set meal moments, inviting people to enter the golden age of Bollywood in the 1950s, through an immersive film set that combines the magic of 1950s Bollywood with tech forward interactive moments using AR and A.I. The event will be curated and hosted by Janhvi Kapoor, and Raj’s Grandson will curate the menu with his grandfather's favorite dishes that live on through Junglee Kitchen.
Bangkok, Thailand – April
- Bangkok street food stalls have been the location of legendary meals and Coca-Cola moments forever. These are all being transformed into Foodmarks, all announced through a magic audiovisual experience that celebrates Bangkok’s most epic night out, featuring Thai culture and culinary talent.
Fans can explore and find Foodmarks across the world through a custom interactive map at cocacolafoodmarks.timeout.com as part of a bespoke global campaign created by Time Out.
