For investors in this pandemic, distinguishing between the temporary winners and consistent performers has surfaced as one of the biggest tensions in the market this year, Aaron Sack of Morgan Stanley Capital Partners told PE Hub.
“For many of the businesses that have survived the lockdown, there’s a lot of pressure on new investors to make sure that these trends are enduring and not just a result of this bizarre world,” said Sack, who heads the mid-market private equity arm of Morgan Stanley.
In other words, not every covid-resilient company should be treated equally. As Sack has observed, many LPs today are asking: “How can investors be sure if a company performed well this year that it’s not just a temporary impact based on, for example, different spending habits?”
“I don’t think everyone is going to stay at home for the next five years,” Sack went on. “Things that performed well but did not outperform due to the pandemic are things that are long-term trends.”
MSCP, for its part, continues to evaluate potential opportunities in packaging, Sack said, having found that within its existing portfolio – through Comar and PPC Flexible Packaging – such assets have had good years but right in line with budget. That’s in part because of their end markets in consumer staples and healthcare, he said.
Facility services is another area that has received a lot of interest, leading to several disparate service providers that are now being consolidated by outsourced providers.
“Home services companies, landscaping companies, HVAC repair companies – these are large and fragmented sectors that we think are going to go through massive consolidation,” Sack said. “Those themes are still really investable. There wasn’t dramatic outperformance [through the pandemic] but solid, continued long-term secular growth.”
Of course, for MSCP, the pet industry has produced more than one strong outcome this year – further validating a market that investors have long touted for its durability and sustained growth regardless of market conditions.
The firm in April completed its majority sale of Pathway Vet Alliance in the midst of a horrible downdraft in the markets, scoring one of the last syndicated LBO loans to get done before debt markets largely shut down. (The vet care giant traded hands at a $2.65 billion value, or close to an 18x EBITDA multiple, bringing on TSG Partners as a majority owner, PE Hub wrote in March.)
That only heightened investor enthusiasm for other pet-related opportunities, ultimately accelerating MSCP’s plans to monetize another existing portfolio company, Manna Pro, a maker and distributor of specialty pet nutrition and care products.
“That’s just something we didn’t really contemplate at the beginning of the year,” but, Sack went on, “we began getting inquiries in the summer, and in the course of this year for the same reasons we saw in vet – we hit our five-year mark in three years.”
The outcome? Carlyle bought Manna Pro back from MSCP three years after selling the business. Sack attributed Manna Pro’s rapid growth and success to its effectiveness in pivoting the business to the most attractive segments in pet nutrition and homesteading (the latter relating to subsistence farming and self-sufficiency).
“Homesteading – think backyard chickens – is following the same humanization trends we saw in dog/cat, just in an earlier inning and COVID has accelerated its growth,” Sack said. “At the time of our investment in 2017, there were plenty of raised eyebrows during our internal discussions about backyard chickens as a growth engine but it’s begun to play out.”
From a broader deal-flow perspective, pent-up demand from covid-19 and the election has fueled a pick-up in activity in recent months and weeks. But with more potential lockdowns looming, Sack for now is wary the comeback will persist.
“With covid, I think it’s a shame because the market felt like it was beginning to normalize after the post Labor Day period,” Sack said. “As the world began to look better, even a couple of weeks ago, [processes] were coming back to market. If we have another spike, they go back into the cooler.”
Sack had been hopeful the resurgence in investment opportunities would help recalibrate supply and demand. “There has been so much demand for quality. We were eager for that backlog to bring volume into the market.”