Private equity and debt capital markets underpinning a sellers’ market in the pet industry

New research has found that private equity and debt capital markets are underpinning a sellers’ market in the pet industry. The global pet industry has seen 154 deals in the last 12 months split between sales to trade buyers (89%) and private equity buyers (11%), according to data from global investment banking and asset management firm, Alantra. This highly fragmented sector is demonstrating steady growth and resilient consumer spending in food, accessories and vet care and together with market fragmentation and strong margins and cash flows, is driving deal flow by private equity, debt lenders and global strategic players. According to Alantra, many lenders are attracted to the sector’s positive market trends and the favourable credit characteristics of speciality retailers, niche product manufacturers and veterinary services. They are supporting private equity investment and acquisition activity across the sector with a range of capital structures. Simon Peacock, a director in the UK advisory business of Alantra and a leading adviser to the consumer goods sector, has identified the following market drivers that are driving acquisition activity in the pet care sector: Private equity increasing investment through buy and build strategies “Many areas in pet care remain highly fragmented with opportunities for private equity to invest in growth platforms and pursue buy and build strategies. Significant capital and the support of a competitive financing market are underpinning activity. Examples include Linnaeus Group, AniCura, Independent Vetcare and Medivet in veterinary services, and Armitage Pet Care in pet products.” Lenders are attracted to sustainable growth characteristics “The small outlay per item and potentially less discretionary nature of spend demonstrates the resilience of the sector through the economic cycle. With strong margins and cash generation appealing to lenders, they are playing an important role in supporting mid-cap buy-outs and the growth of buy and build platforms. “Attractive lending packages are on offer to high quality business with providers of high value- added pet services able to achieve leverage well in excess of 5x EBITDA.” Mid-market private equity has a successful track record “Private equity has established a track record of developing successful platforms and then exiting well to larger financial and strategic acquirers. Some strategic players are looking to buy an established brand and platform which they cannot easily replicate, as illustrated by the recent high-profile exits of Sovereign Capital-backed Linnaeus Group and Nordic Capital-backed AniCura to Mars Petcare, a newly active acquirer in the UK and Europe.” New opportunities attracting attention “Increasing competition for assets and rising valuations, particularly for veterinary practices, mean some investors are starting to look at fast-growing ancillary markets such as pet insurance, practice solutions and analytics IT, grooming, nutrition, health biotech, devices and pet pharmacy businesses. “For example, Inflexion’s recent investment in pet nutritional supplements producer Lintbells will be used to develop new products, accelerate international expansion and gain scale in a fragmented market. As the lifestyle of becomes more sophisticated, so too will the investment platforms.” Rising spending on premium food and accessories “Demand for pet food and treats which emphasise wellbeing and nutritional benefits using high quality ingredients is rising. Newer brands such as Lily’s Kitchen, backed by L Catterton, and Piper-backed Barking Heads are gaining market share and high levels of customer loyalty through continued investment in brand marketing, international expansion and developing their e-commerce platforms.” “Unlike the major FMCG players, Private Equity is prepared to invest early in the lifecycle of innovative brands. Secondary and even tertiary buy-outs are common as specialist investors use their skills to invest in brand marketing and product development, and to professionalise the underlying business. Nestle’s recent acquisition of tailor-made dog nutrition business Tails.com marks the first acquisition by a major player of a direct-to-consumer pet food producer. Tails.com was originally backed by venture capital fund Draper Esprit.”