Inflation and higher interest rates are straining private-equity funds that used leveraged buyouts to buy into the food and beverage market in recent years.
Private-equity funds purchased 786 companies in the food and beverage space in 2021 for a combined USD 32 billion (EUR 29.5 billion). The total sunk to USD 9.7 billion (EUR 8.9 billion) through the first 11 months of 2022, according to S&P Global Market Intelligence, in part due to rising inflation and interest rates and geopolitical instability.
The largest deals in 2022 included a USD 950 million (EUR 874 million) takeover of TreeHouse Foods by InvestIndustrial, a USD 700 million (EUR 644 million) purchase of Bundle Technologies by Sumeru Ventures and Prosus Ventures, and the USD 588 million (EUR 540 million) acquisition of Saratoga Food Specialties from Smithfield Foods by Solina Group and Astorg Asset Management. The USD 212 million (EUR 195 million) purchase of insect feed meal producer Innovafeed by a group of investors that included ADM, Cargill, Temasek Holdings, the Qatar Investment Authority, and Creadev ranked sixth.
Most of these private-equity takeovers employed the use of leveraged buyouts, which use money borrowed by the companies being purchased, which is then covered by the issuance of loans sold to mutual funds and collateralized loan obligation bundlers. However, with the loans tied to interest rates set by the U.S. Federal Reserve, private-equity firms are facing a cash crunch as a result of a 4-percentage-point jump in benchmark interest rates.
Leveraged buyouts can generate returns above 20 percent for private-equity firms, but in 2022, they had generated a net negative cashflow of 9 percent, according to a report by McKinsey & Co.
Higher labor costs, supply-chain disruptions, and the war in Ukraine all contributed to the downturn, as they forced private-equity firms to push through price increases on their products to cover rising costs. But with food prices rising 14 percent in 2022 – way above the 6.5 percent increase in the consumer-price index last year – shoppers changed their buying habits, downsizing some purchases and substituting cheaper brands for others. That can spoil the recipe for private-equity firms, which want to maximize profits but don’t want to raise prices so much that they lose market share to companies with smaller price increases.
Some leveraged companies can buy insurance to protect them from such economic shocks, but it’s an expensive option not always taken, according to the Wall Street Journal. When their loans are downgraded, it can compound their problems, as many investors, such as mutual funds, have limits on how much low-rated debt they can own.
“Multiple headwinds struck at the same time and they would be less pronounced if not for a combination of factors that often lead back to private equity,” Moody’s Investors Service Associate Managing Director Christina Padgett told the WSJ.
The WSJ named Bain Capital as one private-equity firm facing particularly acute struggles after its 2021 purchase of baked-goods brand-owner Dessert Holdings, into which it has invested around USD 1.1 billion (EUR 1 billion). Moody’s downgraded its rating of Dessert Holdings’ debt in January 2023.
Bain Capital divested from its stake in struggling Punta Arenas, Chile-based salmon-farming firm Nova Austral in October 2022, selling to another major private equity firm, Altor Fund II, which is based in Sweden. In mid-October 2022, a representative of one of Nova Austral’s bond providers, Nordic Trustee, acknowledged the Nova Austral was traversing a “challenging” liquidity position, with the company seeking an additional USD 8.5 million (EUR 8.7 million) in new cash equity, on top of the USD 15 million (EUR 15.4 million) Altor Fund III and Bain Capital had injected into the company in December 2021.
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