A spate of interest rate hikes in both the UK and Europe have had profound implications for private equity investment in the consumer, retail and leisure sectors.

In the UK, interest rates reached a 15-year high of 5.25% in September, while the European Central Bank raised its key deposit rate to 4% the same month, marking the 10th consecutive increase.

Figures from the Real Deals Data Hub reveal a significant decline in private equity (excluding venture capital) deals within the growth and buyout sectors of the consumer industry.

The consumer sector includes food and beverages, personal and household goods, media and entertainment, and travel.

According to the data, year-to-date figures show a decrease in consumer sector buyout deals (excluding VC), with 101 deals compared to 145 in the previous year and 187 the year before. A similar trend is observed in consumer growth investments (excluding VC), with 119 deals completed this year compared to 167 in the previous year and 169 in 2021. 

This decline raises the question of whether private equity is withdrawing from the sector.

Pockets of opportunity

Despite the discouraging data, some private equity deals continue to materialise in the consumer sector. 

Disproportionately more deals in consumer are also being put on hold. It hasn’t been an easy sector to do deals in
Inge Cajot, Strategy&

Inge Cajot, a partner at PwC’s Strategy&, notes that investors are becoming more discerning, with resilience becoming a key criterion. 

She elaborates: “We are definitely seeing a proportionately lower number of transactions in the consumer and retail space vs the overall transactions in all sectors. Disproportionately more deals in consumer are also being put on hold. It hasn’t been an easy sector to do deals in.”

However, Cajot emphasises that private equity is not distancing itself from the sector. She says: “[Earlier] deals were being assessed based on agility and growth, whereas now it's more about the resilience of the sub-sector, the business and its model.”

Some verticals within the consumer and retail space that remain attractive to private equity firms include pet care, beauty and consumer health, and food sectors, with Cajot calling them “some of the more protected sectors”.

Examples of these deals include General Atlantic's investment in pet food delivery service Butternut Box, Blackstone's acquisition of French laser clinic chain Lazeo, EQT-backed Karo Healthcare's acquisition of fungal infection treatment brand Lamisil, IK Partners' purchase of meat-free frozen snacks maker GoodLife Foods, and PAI's investment in artisanal desserts firm La Compagnie des Desserts.

Meanwhile, Nicolas Chavanne, head of European retail, consumer and leisure at Advent International, agrees that private equity firms are becoming more cautious and selective in their consumer sector investments. He tells Real Deals: “There’s an important caveat to keep in mind concerning the consumer sector – we do not buy the market, but rather specific investment opportunities. For each investment, we are double checking who will become the potential consumers and that has helped us identify the best assets.”

Year to date, Advent has made two investments in the consumer, luxury and retail space, including French perfume group Parfums de Marly and Australian luxury fashion brand Zimmerman. The private equity firm completed three deals in this sector last year. 

Asset selection has become paramount in today’s challenging environment
Nicolas Chavanne, Advent International

But despite a challenging macroeconomic environment, Chavanne is “optimistic about opportunities for long-term growth”, purely because it has analysed the consumer behaviour for both companies. “The importance of asset selection has become paramount in today’s challenging environment. Understanding the type of business plan and business model has become important to make successful investments in this sector,” he notes.

Consumer, retail and leisure is one of the five sectors Advent invests in. The GP says it has been monitoring Zimmerman since 2010. “Being able to gather information and insights into the companies we are interested in much earlier than potentially investing in them has shaped our conviction around these assets, which has helped us navigate the sector during these uncertain times and avoid bottlenecks.”

Navigating the challenges

A Bain & Company report from May this year indicates a 72% decline in consumer products private equity deal volume since 2021, due to "unprecedented market turbulence".

However, Italian private equity firm Clessidra suggests that unfavourable macro conditions shouldn't deter investment. The key, according to CEO Andrea Ottaviano, is to identify categories that remain resilient despite economic adversities.

During difficult times, GPs need to define the categories that won’t be exposed to any external economic adversities and will continue to grow irrespective of cycles,
Andrea Ottaviano, Clessidra

“[During such times] GPs need to define the categories that won’t be exposed to any external economic adversities and will continue to grow irrespective of cycles,” says Ottaviano.

Ottaviano adds that in a difficult environment, GPs must brace themselves to answer a lot more questions from the investment committees to justify transactions.

Specialist vs generalist 

While generalist funds like Advent and Clessidra believe that private equity isn't turning away from the consumer sector, consumer-focused private equity firm Vendis Capital argues that some generalists are reconsidering their investments in the space. 

Michiel Deturck, a partner at the firm, believes that some of those funds have underperformed in the consumer sector recently and have therefore reduced their exposure. 

“It's understandable why some PE deals failed. The consumer sector is very diverse, with some good areas and some bad. Just like in a big city – where you have got good neighbourhoods and not-so-good ones,” he explains. 

The Belgian sponsor solely focuses on the consumer sector but believes the dealflow is lower only in terms of quantity, not quality.

However, Deturck agrees that not all verticals within the consumer, retail and leisure sectors have fallen prey to the dealmaking slowdown and slump in consumer sentiment. He explains: “Vendis invests in companies that belong to specific niches, have no correlation to the general consumer sector and thereby, manage to go against the tide. For example, toys for adults, such as puzzles or construction toys, are becoming an increasingly lucrative sector.” 

Vendis’s most recent investment is in Meubelzorg, a Netherlands-based manufacturer of premium elderly care custom-made rise and recline chairs. The GP invested in the business because products for the ageing population is another vertical that has managed to buck the sector downturn.

Toys for adults, such as puzzles or construction toys, are becoming an increasingly lucrative sector
Michiel Deturck, Vendis Capital

Other consumer sector verticals that Vendis believes will offer tailwinds to the asset class going forward include digitalisation (for example D2C models taking out the middlemen like importers and distributors), sustainability and health-related concepts.

Deturck also claims the firm has received support from LPs that are overexposed to other sectors and wish to rebalance their investment portfolios. “We see sophisticated LPs that realise consumer is a huge sector, probably too big to ignore, and that it offers a great diversification,” he says.  

Historically, the firm has done two platform and add-on deals each per year and expects 2023 to be another “normal” year.

Leisure and lifestyle

At a time when the consumer sector is witnessing a slowdown in investment, Italy-based Quadrivio Group is doubling down on the leisure sector. The GP is currently raising a €500m fund solely focused on lifestyle companies, and is doing so amid a challenging fundraising environment.

However, it claims it hasn’t had any issues thus far and is aiming to close the vehicle in Q1 2024. Alessandro Binello, group CEO and co-founder, credits the firm’s track record as a reason why the GP is still on track with its fundraise. 

He says: “What is helping us raise a lifestyle-focused fund in this environment is our track record – we are eyeing a 3x DPI to our investors from our first fund. Another reason why we are optimistic is because we have support from LPs who have been overexposed to healthcare and tech in recent years,” Binello tells Real Deals, concurring with Vendis Capital’s Deturck’s view. 

Same as it ever was

Being selective and scrutinising the viability of a business is a point of agreement between PE professionals focusing on the consumer sector. However, this is not a new trend. Investments in the consumer sector have always required a keen eye for potential and an in-depth understanding of consumer behaviour and market dynamics to yield success.

“In reality, consumer goods have been a very good area of investment so long as you are choosing particular brands. You really have to analyse the market to understand what will sell,” adds Binello.

Quadrivio has identified affordable luxury as one pocket that will continue to do well in the short term. Broadly, it believes the lifestyle sector as an attractive proposition from an investment point of view because it enjoys margins that are “hard to find” anywhere. 

Binello stresses that the Ebitda of Quadrivio’s companies in the space has been growing by 30-40%.

“If you choose well, cosmetics, fashion, food and wine can be very resilient segments and can make a big difference in terms of cashflows,” he says.

The word from PE practitioners is that greater certainty around consumer sentiment, spending tensions and the cost-of-living crisis will likely revitalise and spur demand in this space. 

If you choose well, cosmetics, fashion, food and wine can be very resilient segments and can make a big difference in terms of cashflows
Alessandro Binello, Quadrivio

PwC’s summer consumer sentiment survey reveals that it has topped its 18-month high this year. While the sector might still be far away from turning a corner, the survey indicates recovery is on its way to being normal, albeit sluggishly.

The fact that some of the biggest high street retailers globally have been part of PE portfolios at some point (Asda, Pret a Manger, Reiss and Toys ‘R’ Us to name just a few) provides evidence that the sector is probably too big for the asset class to ignore completely.

While it is difficult to know when M&A in the consumer sector will bounce back, Advent’s Chavanne concludes that “understanding of whether [consumer] investments will offer any significant downside protection” might do the trick for the time being.

This article was first published in the Real Deals Consumer Report 2023. Click here to read the full report (no subscription required).