Politics are nasty and this year’s Republican primary has been among the worst in recent memory. As a result of Mitt Romney’s past job experience with Bain Capital, private equity investors have been demonized in the media as cutthroats ready to invest in companies and fire hard-working employees. They have also been defended in the blogosphere as saviors of troubled businesses. The truth is probably somewhere in the middle and can only really be assessed on a case-by-case basis, but this gives us a good opportunity to look at the private equity activity in this industry. I looked at the investments made in the last quarter and noticed some interesting trends.
The natural products and nutrition industries are not full of Googles, Apples or Facebooks that revolutionize the way people live their lives. However, there is a striking similarity in that the people who successfully build big companies in our industry are passionate about the space and stay in it by investing in the next generation. Often they do it as private equity investors.
In January, Gary Erickson, the founder of Clif Bar, and Brendan Synnott, the founder of Bear Naked, both made equity investments that have kept them close to the wellness industry. Mr. Erickson’s White Road Investments was one of the investors in a new round of financing for Manitoba Harvest Hemp Foods, a vertically integrated company that was seeking money to expand its supply chain. Mr. Synnott’s Revelry Brands venture just acquired PACT Apparel, a maker of organic cotton clothing.
Another aspect of private equity investments in this space has been repeat interest from investors in their holdings. Manitoba Harvest is a good example. Mr. Erickson’s co-investors in that round, Avrio Ventures, already held a stake in the company and was happy enough to increase its investment. Palladium Equity Partners also re-upped its investment in Sahale Snacks. What do these companies have in common? They have continued their high growth trajectories after receiving their first rounds of investments.
As a sector, natural foods actually seem to be the darling of private equity money at the moment. We have already talked about Manitoba Harvest and Sahale Snacks, but there are other examples too. Beanitos, a natural corn chips company, received equity investments that included money from the Sweet Leaf Tea founder, and Rooibee Red Tea raised $1 million to fund a distribution expansion in the natural foods channel. On a related note, Annie’s Homegrown just filed for an initial public offering (IPO). While this is not a private equity transaction, it is still important for private equity investors because if the IPO is successful then it indicates there is a strong exit market for these types of investments. In other words, if the IPO failed, private equity investors may think twice about making future investments because the space may not be as strong as it seems. Fortunately, the sector still seems strong.
The supplement space has been active too, even though activity in the natural foods category has been stronger. The deals that have been completed are notable, however. Mega Food, a whole food supplement company led by industry veteran Robert Craven, received an investment from 2x Partners. The deal brought another respected industry veteran, Bob Burke, to the board of Mega Food, indicating a significant commitment to growth for the company. Additionally, 2x Partners was also one of the investors in the Beanitos deal.
Regardless of your opinion about private equity firms, they are active in this industry right now because they see high growth opportunities. This is positive. People who are proven builders from this industry are making many of the investments, as they try to find the next generation of superstar companies. Natural foods seem to be the hot area at the moment, but it is clear there is still money available for attractive supplement companies too.