This year is the 40th anniversary of the establishment of Brynwood Partners, a US private-equity firm that invests in consumer products, principally in food and beverage.

Headed by Henk Hartong III, a former Nestlé executive and the son of Brynwood Partners’ founder, the buy-out house has six food and drinks companies in its portfolio and, in October, closed its ninth and largest fund.

Hartong sat down with Just Food’s Dean Best to discuss Brynwood Partners’ M&A strategy, its plans for the new $750m fund and the general environment for deal-making.

Just Food: With the new fund, will there be any changes to Brynwood Partners’ investment strategy?

Henk Hartong III: No. Our investment strategy from the beginning of the firm’s inception has been to take operating skills and investing skills and combine them to accelerate performance. My dad had idea when he launched Brynwood and was considered quite unconventional at the time. That was the time when it was all about leveraged buyouts, leveraged finance and financial engineering. He took a completely different approach. We’ve now taken that to where we are today with the same strategy. The one fundamental shift over that period of time has been our concentration on consumer products and specifically in the food and beverage space, where he was more of a generalist at the beginning with some sector focus across a few different areas. We are exclusively focused on consumer products and, right now, just in food and beverage.

Just Food: In broad terms, what attributes do businesses need for you to be interested in acquiring them? What level of sales, what position in categories, what types of brands must they have?

Hartong III: The easier way to answer that question is: what are they not? What they’re not are growth equity opportunities in young, immature businesses or categories that have explosive growth, have caught a niche or wave on a new product or a new category trend. [With those] the concept is: we’re going to take this business, we’re going to pay a big multiple for it, we’re going to model out all the growth that’s going to come from things that we don’t control – market expansion and consumer behaviour changes – with the hope that we’ll sell it to a strategic buyer at an even higher price at some point down the road. That we’re not doing.

We’re looking for businesses that have good fundamentals, which have been under-managed in some way, shape or form. By definition, corporate carve-out is exactly that. It’s a business that sits in the bigger portfolio that has been bounced around the priority list within a larger organisation. They have to determine what things they’re going to put resources against. They can’t do everything and the smaller under-managed, orphan, non-strategic brands typically are casualties of that strategy.

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That doesn’t mean those businesses aren’t good. It just means they’re not prioritised. If you take them out of that organisation, give them all the things they’ve been deprived of: resources, attention, focus, investment, so forth, we can take the business and make them perform. We don’t want distressed or broken businesses. We want businesses that have been under-managed.

Just Food: How easy is it to identify those unloved brands that are already part of big food or drinks companies? Could it be the case that they are unloved because the parent doesn’t see much growth opportunity? Have there been times when the assets you bought didn’t perform as well as you had expected?

Hartong III: Yes, nobody’s perfect in this business and anybody that tells you that they are is not being transparent but, for the most part, we’re pretty good at identifying the businesses that have had a particular — I always look at it that some people will try to sell you the idea of ‘If you do this going forward, you can create this trajectory with the business.’ I tend to tell our guys ‘Look back at the last five years. Where have the sales trends gone? What’s happened with the category? Why has this business been underperforming?’

We look back and say ‘What’s happened in the last three to five years and what caused this? What lack of attentiveness has created this outcome and do we think we can apply these decisions that make the business go?’ Those are things we can control.

Almost all these businesses we buy are either flat or declining sales. What private-equity firm wants to buy a business with flat to declining sales in a medium- to low-growth category and, if you do a corporate carve-out, where you get no management? That excludes a big chunk of that competitive field that would normally be chasing a deal like this.

Just Food: How many live investments are in the Brynwood Partners portfolio?

Hartong III: Six investments, 17 factories all in the US, of 5,000 employees and our annual sales are about $3bn. If you look at just US food and beverage companies, if you look at us more as a conglomerate, an assortment of individual investments, we get to be quite large relative to some in our peer group in terms of valuation, revenue size, people size. We’re a significant player. We do a lot of business with some of the largest retailers in the US, too, which gives us scale as well.

Just Food: What are the typical initiatives Brynwood Partners looks to implement when it buys a business? I guess you’d be looking at any consolidation opportunities, whether that’s manufacturing rationalisation, any kind of streamlining, as well as revenue growth.

Hartong III: Yes, I mean, look, we just, as a good example, we just bought West Madison Foods, which was the Dean’s and Marie salad dressings, from Ventura Foods. It’s gone terrific. We’ve staffed an entire management team with really good people, put in an office in downtown Chicago, which is 45 minutes’ drive from a single factory in the southern part of the city and I’ve started implementing not only the carve-out but also some of the important commercial changes that the business needed.

It was a $160m business inside of a $3bn foodservice company, so it was clearly a classic corporate orphan. We’ve been applying our playbook against this, complete the carve-out, start investing in the commercial and consumer solutions that are required, visit all of our customers to see what’s been missing, what we can do to think things through better, develop the standalone supply chains so we can service the customer and oftentimes invest in the factory.

If you think about these businesses, [and] the manufacturing, if you’re in a multi-plant, large company and you’re running the factory that’s the non-core asset and you get in line for capital expenditures every year as part of the budgeting process, you typically are like the smallest kid at the table. You’re getting fed last if you’re getting fed at all and so, oftentimes, we see quick investment in manufacturing because there’s not only deferred capital but there’s deferred growth opportunities in terms of capital and we like to look at all of that and quickly start making some big bets on what we think is going to be the ways we can unlock value in the deal.

Just Food: How many investments do you think you could hold at once?

Hartong III: Well, that’s a good question. It depends on the size of the businesses. With our management, we certainly have capacity because we’re out actively looking for new platforms and Brynwood IX we have our first [investment] with West Madison. We hope to have one to two more done within the next six to nine months. We have a couple in our sights that we think we can get done.

I’d say I’m also looking to divest a few of our businesses, so I think, depending on the size of each of the platforms, eight is probably the upper end. In our model, you got to cover your companies. It’s very rare that we have everybody in the office. Typically, we’re out on the road visiting our customers or our factories or corporate offices and so forth.

Just Food: When you survey the US food and beverage market, are there particular categories or segments you’re focusing on?

Hartong III: As a general matter, we’re not typically looking at a sector of the food and beverage space, or consumer products for that matter, and saying ‘Oh, we like that. We’re going to find a deal in that space.’ That’s where a lot of other folks that are investing in consumer products do. They pick category, deal, management, right? We typically don’t do that. I mean, there are some sectors that we like better than others but, if you think about our portfolio right now, we’re in contract manufacturing in Carolina Beverage, we’re in private-label frozen pizza with Great Kitchen, we’re in refrigerated pasta and sauce with Buitoni, we’re in chilled and ambient juices – and alcohol – with Harvest Hill and we’re in ambient baking and frozen breakfast with Hometown Foods. We’re experienced in every section of the store. With Marie’s salad dressings, that’s a produce item that’s sold next to the bag salad. The Dean’s French onion dip is sold next to the sour cream in the dairy, so we’re pretty much in every part of this store but for the deli and in-store bakery.

Marie’s salad dressings on sale
Marie’s salad dressings on sale. Credit: @zalliefamilymarkets / Facebook

Just Food: Which categories do you prefer?

Hartong III: I like the centre store the best because it’s got the most volume. This is a volume business. If you’re trying to invest in medium- to low-growth categories where your thesis is to run the business better and take market share, and maybe grow the category while you’re doing that, you’re better to go into bigger spaces where you have more feet and eyeballs looking at those sections of the stores because it’s easier to create the volume quicker.

Just Food: Thinking about those potential one to two platforms over the six to nine months, should we expect another deal or two to be in the centre store?

Hartong III: Yes, well, I would hope so. We’re obviously looking for tuck-in acquisitions always when we have a platform. Some of our deals are pretty mature. Certainly, West Madison is very young and that space lends itself quite well to create add-on acquisitions. We’ll be looking at how we can generate more scale in that business hopefully and, if we see the right opportunity, we’ll make a move

Just Food: Are there any live discussions going on either potential acquisitions or disposals?

Hartong III: Yes, we’re actively trying to sell companies in our portfolio.

Just Food: Is Brynwood Partners focused squarely on North America? Would there ever be a time where you could look to expand geographically?

Hartong III: The answer is, for the most part, no, we would not be looking to diversify. If for some reason we have a business that has an export element outside of North America, we would consider it provided we don’t have boots on the ground outside of the core market. If it’s a licence deal or a third party that’s handling sales and marketing, we do not want to be trying to manage, sell these products in Europe, AMEA or other places, except as an export market. We would sell it to a distributor [and] they would then handle it from there.

Just Food: What are your thoughts about the macroeconomic environment in North America and the impact that could have on the level of deal activity in food and bev in 2024?

Hartong III: It’s a difficult fundraising environment. It’s a difficult operating environment. Clearly, the interest rates have changed the way we’re looking at originating deals. If you flip back over the previous 12 months and look forward to the next 12 months, I’m not going to be the one that’s going to forecast interest rates but I don’t think anybody would have expected the inflation and the interest rates would be as stubborn and hard to beat back as they have been.

That being said, deals were always getting done but they weren’t deals with the level of size nor the amount of deals that you’re seeing in the last six months relative to the previous 12. I think you’re going to see a pretty active market. It’s just really a function of how people are going to finance them. What assumptions are they making? Where’s pricing going to fall out? A lot of that has to do with market conditions but the buyers are all looking for growth again, at least in the sector we invest in.

If you unpack what’s now almost four years, since Covid started, you went from hyper growth – if you were in the grocery-oriented business, all the sales from foodservice came to grocery when the restaurants closed. That fundamentally changed the way people shopped and prepared food in their house and a lot of that stuck – we went from the first 12 months of that when the sales were incredible and your whole focus was to keep up with the demand, to the supply chain challenges and inflation.

And now, as those have somewhat come back and – it depends on the category – but somewhat normalised and inventory is more readily available, you’re tending to see more of a fight for market share again. That means the companies that were holding on to non-core assets because they were performing – you could sell anything in those first few years of the pandemic – are now re-evaluating their portfolios and looking to shed the non-core assets that are constraining growth and looking to acquire growth where they see opportunities to do so. That’s created more deal flow now going forward, with the understanding that market conditions are tough and inflation and interest rates don’t seem to be going anywhere. You have to make sense of valuations and how you finance them if you’re a private-equity buyer.

Just Food: Potentially, there could be more willing sellers. Corporates may be, after 12 to 18 months of quite significant cost inflation, running the rule over the profitability and growth prospects of certain assets. That’s where Brynwood Partners would come in?

Hartong III: Well, look at our last three deals, right? We bought Birch Benders from Sovos – and Sovos is in the process of being acquired by Campbell’s – we bought Uno’s from the owner of the restaurant company that divested the foods business and we bought West Madison Foods. All three corporate carve-outs in the last nine months. That’s a lot of deals at a time when people aren’t doing deals. All three of them were kind of classic carve-outs, much in the sense that you would look back over our last 20 years and see those are the types of deals we do.

Just Food: Are you expecting more competition among your peers for assets?

Hartong III: If you’re in the bigger deal space, for sure. We tend to not swim in that pond. From what we’re looking for, the deals that require a lot of operational conviction to get done, that require a lot of operational work post-closing in a tough environment for volume with high interest rates and interest coverage requirements, I think those types of deals take a little bit more courage to do, so I expect we won’t see nearly as much competition on the tougher deals but the margin for error’s lower with the banking costs as they are.