Why is Private Equity So Interested in the Pet Industry and is Your Company a Candidate?
Carol Frank
I get at least one contact a week from a private equity firm
that wants to invest in the pet industry. As politely as I can, I
tell them to line up behind the other 50+ firms I have on my
list that would like to invest in pet. As owners of
manufacturing companies, you probably get many of these
calls as well. So I decided to delve into the question of “why
is private equity so interested in pet, and what type of
companies would be an ideal acquisition for these groups? “
Over the past several years, pet industry analysts have
witnessed an increase in mergers and acquisitions and a
significant inflow of capital into pet businesses across the
country. The action the pet industry has seen is primarily
attributable to institutional capital’s demand for recessionresilient companies and innovative operators. Since the
demographics in the pet industry are such that customers
continue to own pets even in recessions, and operators
typically find creative solutions to address underserved
markets, demand has been piqued in the pet industry.
Conversely, multiples in the industry have been on the high
end relative to manufacturing and distribution counterparts
in other industries because demand for these companies
exceeds supply of pet companies that meet private equity’s
criteria. As a general rule, for companies to be PE-ready,
they have to have or be close to $1 million to $2 million of
EBITDA, which basically translates into a company doing at
least $15 million in sales.
The challenge for many of these potential industry investors
is finding a company, or group of companies, that allow for
significant sums of capital to be put into the pet industry.
Once a pet company reaches $2 million of EBITDA, the
marketplace becomes extremely friendly – even downright
competitive.
There are a large number of companies with great products
and superb management teams. If they can achieve some
scale and profitability upwards of $1 million to $2 million
EBITDA, they become extremely attractive to private equity
investors. Since the market seems to have spoken on this, it
should be no surprise to see companies moving in this
direction. Some of them will do it organically, while others
will do it through acquisitions. This is why we have seen so
many lower-middle market strategic transactions in the pet
industry.
To make sense of the recent demand for pet industry
companies, one has to understand the dynamics within the
private equity world. Private equity is sitting on a record
amount – almost $500 billion – of unused capital. This unused
capital is often referred to as “dry powder.” As corporate
profitability returns, outside capital is being put to work in
stable, well-positioned companies. The positive demographics
of the pet industry are attractive to this capital.
While the pet industry has been on the receiving end of much of
this activity, it’s a trend that’s been developing across the
broader middle market. A recent survey of fund managers
found that an increased investment of capital is expected in
2012. According to the Perspective Private Equity Study by
BDO, 22 percent of fund managers expect to invest between $30
million and $50 million in deals and acquisitions during 2012.
This is a significant increase, up from just 10 percent of
respondents a year ago. And 16 percent of fund managers
surveyed said they would deploy somewhere between $51
million and $100 million in capital over the coming year, an
increase from only 11 percent last year. That means a record
amount of dry powder is now being aimed at the middle and
lower-middle markets. Those in the pet industry are among the
most highly sought-after targets.
The sharp rise in deployed capital, along with pre-recession
EBITDA multiples in private equity is an excellent signal for
those looking to sell a business in 2012. The combination of
pricing and increased deal flow means now is the time for
private equity candidates to prepare for sale. Those in the pet
industry have a great opportunity to place themselves right in
the middle of this equation.
Carol Frank of Boulder, CO, is the founder of four
companies in the pet industry. As a Managing
Director at SDR Ventures Investment Bank, Carol
leads the team in executing pet industry transactions
including M&A, capital formation and strategic
advisory services. She is also the owner of BirdsEye
Consulting, the consummate source for pet sector
consulting expertise.
She can be reached at carol@carolfrank.com