Coffee and a doughnut at one-third the Starbucks price made Shipley Do-nuts attractive to Peak Rock

The best food and beverage opportunities are family- and founder-owned businesses and corporate carveouts, said Peak Rock's Yoni Riemer.

Peak Rock Capital has made 13 platform investments in the sector over the last 10 years. To learn more about dealmaking in the sector, PE Hub asked managing director Yoni Riemer to outline the Austin-based firm’s strategy.

What’s driving PE-backed deals in the food and beverage sector?

Food and beverage businesses have become an area of focus for many private equity investors. In today’s current macro-economic environment, businesses are being challenged by inflation, supply chain disruptions and labor constraints, which we anticipate resulting in a wide dispersion of outcomes for these F&B businesses. Businesses that have resilient and recurring demand profiles as well as excellent operational capabilities, and where management teams have demonstrated an ability to execute their growth plan throughout volatile markets, are likely to be more successful than businesses that are more dependent, or sensitive to, more fickle consumer trends.

As we look at our pipeline of potential food and beverage investments, we think the most attractive opportunities continue to be family and founder-owned businesses and corporate carveout opportunities – businesses where we can roll-up our sleeves and work with management to professionalize, expand capabilities and execute on their growth potential.

Please describe Peak Rock’s investment criteria and growth strategy.

Within food and beverage, we search for both family and founder-owned businesses with strong track records of growth and resilient recurring consumer demand, where we see near-term opportunities for transformational growth and business professionalization. Likewise, we have had success investing in corporate carve-outs, where in our view the underlying business or core product offering has terrific growth potential, but may not be a core priority within a larger portfolio of assets. After we acquire a business, we have a proven playbook of working with management teams in executing expansions of production capacity, investing in innovation, and bringing in organizational talent – all with an eye toward serving customers and delivering innovative new products to the category.

Because of the importance of innovation in increasing both revenue and scale, and the overall attractiveness of our businesses, a cornerstone of our strategy is delivering differentiated products. We primarily execute on three key growth levers: building or expanding world-class manufacturing facilities, investing in new product development and innovation and optimizing a company’s go-to-market strategies.

Yoni Riemer, Peak Rock Capital

What do you look for in a carve-out?

The carve-out targets we engage with are typically businesses that either are, or have the potential to be, excellent platforms for growth. However, because of the nature of being captive within a larger organization with competing corporate priorities, these platforms often can end up starved for capital, resources and/or talent. Unlike a large strategic or conglomerate, we and the company’s management team are singularly focused on the success of that individual business and are less constrained when it comes to making high ROI investments. Our Peak Rock 100 Day Plan, which we customize to each business and implement post-acquisition, looks to rapidly deploy resources toward jumpstarting growth.

Supply chains all over the world are facing huge challenges. How do you develop protections for your portfolio companies?

In general, we try to shorten the supply chain. This means wherever possible using US manufacturing partners. It also means prioritizing supplier redundancy, reducing logistics complexity through the use of software and tech-enabled partners, and managing working capital closely. This procurement optimization process is a key component of our 100 Day Plan, which is then repeated regularly throughout our ownership period.

Peak Rock sold TNT Crust to General Mills and Pretzels to Hersheys. Tell us about the exit environment.

Strategics are looking for brands that are growing quickly, that will enhance their overall revenue profile, and are complementary to a company’s existing offerings in a category.

TNT Crust checked all the boxes for General Mills, as it builds on their strong position in the fast-growing away-from-home category, provides further scale and has great better-for-you offerings. General Mills was also attracted to the company given its in-house manufacturing facilities which we had invested in under our ownership – helping them de-risk the supply chain.

In the case of Pretzels, Hershey’s was looking to grow its presence in the rapidly expanding snacking category, particularly savory and better-for-you snacks. Our business was an attractive and logical acquisition for them for some of the same reasons: Best-in-class facilities and an experienced team with unique product development capabilities.

What kinds of returns are you getting on food and beverage companies these days?

While we do not comment on individual returns, we have found that executing a strategy focused on generating meaningful revenue and EBITDA improvement in the mid-market has resulted in successful businesses. In addition, we’ve been able to have a further positive impact by creating growth and employment opportunities in the communities our businesses serve.

What’s the future for food and beverage deals, especially in the context of inflation and rising interest rates that will affect how consumers spend their money?

We expect inflation, lack of labor availability, and supply chain disruptions to continue to challenge mid-market businesses for the foreseeable future. Core to our strategy is investing in businesses that are more resilient in economic dislocations, sell consumable and non-discretionary products, have long-term recurring customer demand profiles, and in some cases, are attractive substitutes to consumers wishing to ‘trade-down’ in times of economic uncertainty.

For example, our portfolio includes Shipley Do-nuts, a beloved consumer brand. We think being able to get an authentic and high-quality cup of coffee and doughnut, at a third of the price of Starbucks, is a particularly attractive business proposition in general, and even more relevant today than it has been in the last decade.