Private Equity in the Consumer Space (2022)

Transformation in the Consumer Goods & Services sector

Private Equity in the Consumer Space (1)

Once synonymous with predictability, the Consumer Goods and Services (“CGS”) sector is in the midst of a transformation, driven by disruptive technology and evolving consumer behaviours. The events of 2020 accelerated the pace of digitalisation, and reshuffled consumer priorities in ways that will completely reshape the industry, long outlasting the global pandemic. These are the types of changes that open up avenues for exciting investment opportunities.

Private Equity in the Consumer Space (2)

But the industry's current transformation isn't its only appeal. Consumer spending has long been a cornerstone of the economy, and an essential component of a private equity portfolio. Consider the state of Europe's consumer spending. The European consumer market, the second-largest following the United States, reaches nearly US$15 trillion a year [1]. To miss out on exposure to the consumer sector is to forego a very large opportunity set in private markets.

Compared to other industries, by its nature, CGS is heavily influenced by consumer behaviour. And with consumers adopting radically different shopping habits within a very short time, businesses are quickly re-strategising to capture a changing market. While for some businesses the changes will be detrimental, there will be a number for whom this will be a period of significant growth: shoppers, their routines upended by the pandemic, have shed loyalties to tried-and-true brands, and are exceptionally open to trying new products [2].

Today’s customers shop smaller brands, value eco-friendliness, and are looking for a seamless digital journey. Investors who can identify the businesses best catering to these priorities are most likely to come out on top.

Defining a vast sector

The Consumer Goods and Services sector is defined by its customers: consumers and households (as opposed to businesses). The sector encompasses a large portion of non-cyclical goods, such as groceries and personal hygiene, that consumers continue to purchase regardless of economic cycles. But while economic factors may have a lesser impact, trends in day-to-day consumer behaviours play an outsized role in shaping the successes — and failures — of CGS businesses. Thus, changes in the way we live, work, and play can greatly affect the industry.

Private Equity in the Consumer Space (3)
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CGS is a broad sector that can be further subdivided into various verticals, though categories can be somewhat porous. Several key areas for investors include Food and Beverage, Clothing, Beauty/Personal care, Automotive, Electronics, Media, and Consumer Services. However, consumer dynamics across verticals share more similarities than differences. As consumer behaviour is the ultimate driver of business models in the CGS sector, the delineations are often less significant than investors may think.

At a higher level, some might draw a distinction between the Technology and Consumer sectors. But Technology companies that serve consumers have the same path to success as those businesses that lie squarely within CGS. Both require a strong understanding of the consumer in order to get ahead. By itself, the most advanced technology is unlikely to win the market. What is also needed is a strong understanding of brand dynamics, consumer behaviour, and the disruptive effects of technology.

There is one area in which differentiation may greatly benefit investors, and that is the distinction between ownership and experience. The consumer space has seen a recent increase in spending on experiences and enjoyment, and a corresponding decline of the importance of ownership of goods. Though time will tell if these categories will significantly diverge in terms of market share, this shift highlights, better than any vertical categorisation, how consumer behaviour and changing priorities drive the industry’s trajectory.

CGS: An attractive opportunity for today’s investors

Consumer Goods and Services already play an important role in today’s private equity landscape. The sector currently holds one of the largest shares of investment from European private equity at 19% [3], second only to investments into Technology companies. The European consumer, whose middle class is 200 million strong, is also one of the wealthiest, with household wealth reaching US $94.2 trillion [4].

Global PE Backed Buyout Deals in Consumer Sector

Private Equity in the Consumer Space (4)

Source: Preqin

Private Equity in the Consumer Space (5)

Globally, private equity investors allocated $35B USD to the CGS category in 2020 [5]. Looking ahead, experts predict a strong, upward trajectory in M&A deals across Consumer and Retail as the sector engages in value-driving activities such as restructuring and divestiture in the wake of the pandemic. In its survey of executives across Consumer Packaged Goods and Retailexecutives, management consulting firm Kearney has already found that “nearly 40 percent of executives had significantly increased their divestiture activity during 2020 [6]."

Investors may have previously shied away from the CGS sector, hesitant due to its stability, predictable purchase cycles, and recurring revenue streams (think about how often you grocery shop, buying the same products weekly), seeing this as equivalent to unexceptional returns.

Private Equity in the Consumer Space (6)
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But the CGS industry has recently received a long-awaited dose of innovation, paving the way for transformation and opportunities for outsized returns. Companies are quickly adapting to increased digitalisation, shifting customer loyalties, and brand-new shopping behaviours, taking advantage of the massive opportunity in front of them. And there’s plenty of room to grow: Compared to all the other industries, CGS is one of the least digitally mature, ahead of only Automotive and Infrastructure [7]. By leaning into digitalisation, CGS can also meet the increasing consumer demand to discover, engage with, and shop brands online.

Trends in Consumer Goods

The pandemic accelerated the ongoing seismic shifts across households and global economies alike, providing fertile ground for growth opportunities and business transformations. Whether through lockdowns and public health concerns, or value shifts driven by the social and environmental advocacy of younger generations, consumer purchasing habits have evolved, spurring industry-wide change. There’s a new playing field, and businesses are vying for market share. Funds investing in the companies taking advantage of trends around digitalisation, loyalty, and value — and responding to the distinct needs and demands of younger shoppers, a crucial emerging segment — will be well-positioned to reap impressive returns.

Digitalisation

Technology across CGS had already been advancing at a fast clip, but the pandemic has accelerated e-commerce’s share of total retail sales to 2-5x its previous growth rate (4.5x in the United Kingdom, 3.3x in the United States) [8]. The shift to online has accelerated the creation of new businesses and brands, increasing competition and challenging brand loyalties. Despite the fact that public health concerns were the key driver of the mass migration to online shopping, experts note that this consumer habit is a sticky one — expected to continue long after the pandemic [9]. Businesses are under pressure to adapt to these demands, investing in skills and technologies to gain a competitive edge.

Even after store openings and more relaxed public health regulations, many e-commerce adopters who continued to buy online were driven by bigger savings. A survey conducted by PwC showed that customers online shopping in 2021 are primarily motivated by price, which outpaces other factors — including quality and convenience — across all categories of spending. With the extent of job losses triggered by the pandemic, more and more shoppers are now paying extra attention to price tags: In March 2021, 56% of consumers reported that they’ve become more price-oriented since October 2020 [10].

Private Equity in the Consumer Space (7)

An internal digital transformation is also underway. Customers are demanding deeper digital engagement with brands, and marketing channels and efforts need to shift in order to bridge the online and offline gap throughout the entire customer journey [11]. As marketing teams re-strategise and move budgets to digital, guidance and additional capital from private equity can help turbocharge these efforts.

Loyal no longer

When the pandemic hit, many shoppers couldn’t purchase from their preferred brands — whether due to hiccups in the supply chain, an unwillingness to shop at a particular physical location, items being out of stock, or a variety of other factors. As a result, many consumers experimented with new brands, disregarding past loyalties in favour of convenience and immediacy. Emerging CGS businesses are capitalising on this moment of transition, acting quickly to connect with potential new customers looking for their next purchase. This is

especially true for smaller, nimble brands, who have seen an extraordinary growth driven by younger shoppers. In fact, US millennials shopping in the food category are 6x more likely to find smaller brands “better or more innovative [12]."

Private Equity in the Consumer Space (8)

Value-driven shopping

Younger generations are looking for businesses that align with their values, and that effectively communicate what those values are [13]. Now more than ever, consumers are scrutinising a business’s ESG activities, their impact on their greater community, and, internally, their overall business culture and employee treatment [14]. Today’s shoppers are more likely to buy from brands with a “strong purpose,” and willing to pay more for products from companies whose supply chains are strongly aligned with a widely-communicated ESG mission [15]. A startling 79% of buyers reported in 2020 that they’ve changed their brand preferences based on sustainability factors [16].

Consumer spending

Personal Consumption Expenditure (PCE) dipped during the pandemic, as would be expected during a period of extreme economic uncertainty. But the era of growth may continue. In the United States, PCE is projected to increase by 7.6% in 2021, and then again by 3.9% the following year [17].

Across the various categories of consumer spending, 23% shoppers globally reported that, in the near future, they see themselves spending more in at least six categories. The top categories expected to benefitincluded groceries (37%), takeaway food (32%), home entertainment (30%), and fashion (28%) [18].

How PE can help CGS companies reach their potential

Compared to private equity activities today, PE strategies around CGS growth used to be rather limited. They focused significantly on financial engineering, improving profit margins through cost-cutting and operational efficiencies.

Today’s tactics are more strategic in nature. A prime example is branding guidance and renewal. A brand is one of a consumer company’s greatest assets, and improving a brand’s image is an advantageous focus area for investors. By helping businesses appeal to higher-value customer segments, reach potential customers open to trying new brands, and communicate ESG efforts and community values to younger shoppers, funding along with deep marketing and branding insights from private equity investments can help take CGS companies

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to the next level.

Private equity firms also help CGS businesses expand their offerings and global footprint. Investments can drive product innovation and international go-to-market strategies that consider regional differences in consumer behaviour and channel preference, accelerating customer acquisition. The mix of value-add strategies varies across the company size spectrum, with possibilities present both in smaller growth opportunities and more established buyout transactions.

Private Equity in the Consumer Space (9)

In the race for digital transformation, private equity’s injections of capital can give businesses what they need to pull ahead — whether that’s an improved digital customer experience or more advanced, internal marketing systems for enhanced targeting. With customers looking to connect across the digital divide, CGS businesses are working to quickly bridge the online and offline gap, creating a seamless customer journey with multiple touch-points. At the same time, they’re preparing to consolidate their data across these areas, which will allow them to drive new sales with centralised reporting and a greater understanding of their customers.

Today, plenty of brands are already making their way to successful exits with support from private equity firms and funding. Nun, a leading brand in sports hydration, was recently acquired by Nestle Health Science [19]. With funding and guidance provided by TSG, a consumer-focused private equity firm, Nun was able to rise to success much more rapidly. The company received marketing expertise and additional resources to expand its business, adding new product categories and channels — actions which boosted and diversified the business, rendering it a more attractive acquisition target for the Food & Beverage giant.

In summary

The Consumer Goods and Services sector is in the midst of a sea change, and investors have a unique opportunity to capitalise on the acceleration and transformation that’s underway. The shifts in customer behaviour and evolving priorities have re-leveled the playing field for businesses, and many are now keenly aware of the tremendous potential for growth. CGS companies are quickly leveraging opportunities across digital expansion, new customer acquisition, and value-driven shopping. However, they can act even faster and outpace the competition with additional support and funding, along with the connections and guidance that

private equity can offer. With a heightened growth potential and a push toward innovation, CGS is well-positioned to deliver extraordinary returns for savvy investors.

Footnotes

[1] World Bank, World Bank Open Data. Final consumption expenditure (current US$) (2019)

[2] McKinsey & Company, “Perspectives on retail and consumer goods” (2020)

[3] Invest Europe, “Investing in Europe: Private Equity Activity 2020” (2021)

[4] World Bank, World Bank Open Data. Final consumption expenditure (current US$) (2019)

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[5] DealEdge; Bain analysis

[6] Kearney, “Forged in crisis, poised to innovate” (2021)

[7] McKinsey & Company, “Perspectives on retail and consumer goods” (2020)

[8] Retailing by Euromonitor International; McKinsey Global Institute Analysis (2021)

[9] Bain & Company, “Unleashing Online Brand Growth with the Right Operating Model” (2021)

[10] PwC’s June 2021 Global Insights Pulse Survey

[11] McKinsey & Company, “Perspectives on retail and consumer goods” (2020)

[12] McKinsey, “Millennial Survey” (2019)

[13] Bain & Company, “Global Private Equity Report 2021” (2021)

[14] McKinsey & Company, “Perspectives on retail and consumer goods” (2020)

[15] Alexis Bateman and Leonardo Bonanni, “What supply chain transparency really means,” Harvard Business Review, August 2019.

[16] Capgemini survey (2020)

[17] Deloitte, “United States Economic Forecast” (2021)

[18] PwC’s June 2021 Global Consumer Insights Pulse Survey

[19] TSG Consumer Partners, “TSG Consumer Partners To Sell Stake In Nuun To Nestlé Health Science” (2021)

Disclaimer

The views, opinions and estimates expressed herein constitute personal judgments of certain members of the Titanbay Ltd. (Titanbay) team based on current market conditions and are subject to change without notice. This information in no way constitutes Titanbay research and should not be treated as such. Titanbay does not make investment recommendations, and no communication, including this document, should be construed as a recommendation for any security offered on or off the Titanbay investment platform. The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production.

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This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, investors should make an independent assessment of the legal, regulatory, tax, credit and accounting implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment in private placements involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Past performance is not indicative of future results. Non-affiliated entities mentioned are for informational purposes only and should not be construed as an endorsement or sponsorship of Titanbay.

Investments in private placements, and private equity investments via feeder funds in particular (such as through the Feeder), are speculative in nature and involve a high degree of risk. The value of an investment may go down as well as up, and investors may not get back their money originally invested. Investors who cannot afford to lose their entire investment should not invest. Past performance is not indicative of future performance. Please refer to the respective fund documentation for details about potential risks, charges and expenses. Prospective investors should carefully analyse the risk warnings and disclosures for the respective fund or investment vehicle set out therein. For private equity investments via feeder funds, investors will typically receive illiquid and/or restricted membership interests that may be subject to holding period requirements and/or liquidity concerns. Investments in private equity are highly illiquid and those investors who cannot hold an investment for the long term (at least 10 years) should not invest. The external Alternative Investment Fund Manager is Avega Capital Management S.A., a public limited company (société anonyme) formed under the laws of Luxembourg, with registered office at 2, rue Edward Steichen, L-2540 Luxembourg, Grand Duchy of Luxembourg, and registered with the RCS under number B 246.691.

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FAQs

How do you answer why do you want to work in private equity? ›

What to discuss:
  1. Highlight that you have some transaction experience.
  2. Express an interest in a sector that the PE firm invests in.
  3. Position yourself as a long-term thinker or investor.
  4. Show that you know what the PE firm has invested in.
  5. Express a desire to work with portfolio companies to create value.
13 Oct 2022

How do I write a private equity cover letter? ›

Your private equity cover letter should explain your investment philosophy, how you manage a fund and how you grow the fund. Definitely include any impressive numbers or investments you made that beat the market, but do more than tout the percentage growth of funds you have worked on — detail how you made it happen.

What makes a good private equity target? ›

The target company's facts and figures must support those forecasts. Even more specifically, private equity firms want to see at least 20 to 25 percent annual profit, which may require the company to improve EBITDA, obtain economies of scale or synergies, and earn high margins.

How could private equity firms help change and improve their portfolio companies? ›

Private equity professionals can identify the skill gaps and leadership issues in an existing team. They take measures to improve their performance, such as upskilling the internal management team or hiring interim managers or consultants to improve the team's performance.

What do you say in a private equity interview? ›

Describe a deal you worked on at Investment Bank X.
  • Describe the industry and the company's business model.
  • Discuss the revenue, EBITDA, or earnings of the business.
  • Talk about the valuation that the company sold for (EV/EBITDA, or other) ...
  • Outline the strategic rationale for the transaction.
13 Oct 2022

What do private equity firms look for in candidates? ›

Firms often prefer candidates with a strong professional background in investment banking, corporate consulting, strategic consulting, or corporate restructuring. Candidates for private equity firms also benefit from several specific soft skills.

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