From ketchup to hot drinks, family-run investment firms are shaking up the consumer deals market, squeezing out private equity players and forcing them to change strategy.
Families, some of whom made their money from the consumer sector, have deep pockets and are looking to secure their wealth for future generations. They are willing to wait longer for returns, giving them the edge over private equity funds looking for a quick turnaround.
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Joh A Benckiser (JAB), the investment vehicle of the German billionaire Reimann family, bid for Douwe Egberts coffee last month, creating a hot drinks empire to take on the market leaders Nestle and Mondelez International, a goal that may take some time.
"Part of the reason for traditional private equity firms not being involved in the D.E. Master Blenders transaction was that the multiples were too high to make the returns work," said Magnus Scadden , Head of EMEA Consumer and Retail at Houlihan Lokey, an investment bank.
Family-funded investments in the sector are expected to grow. In Europe this year 9 of the 51 newly minted billionaires have made their money through investments in the consumer sector, the Forbes Rich List calculated.
"Food and beverage continues to be a very attractive industry... It's a perfect storm for these guys to be more competitive. It's not that they play better, it's just they have a lot of experience in the industry and, for the most part, a different and longer investment horizon," said Jaime Arrastia, co-head of the consumer and retail investment banking division for Europe, Middle East and Africa at Barclays.
JAB have hired industry veterans to run the show, including CEO Bart Becht, who used to head up U.S. consumer products group Reckitt Benckiser and head of audit Olivier Goudet, a former CFO of U.S. confectionary giant Mars.
Bankers say other family companies with the potential to do such deals include Maxingvest, the investment vehicle of the Herz family, which owns the Tchibo coffee retail chain and a majority of skin care company Beiersdorf and Verlinvest, a Belgian family-owned investment holding company has invested in several consumer companies such as spirits group Remy Cointreau.
"They just have more tools in the box, more keys to unlock things," said a sector banker of family run investment vehicles.
Co-investing is another option for family firms. 3G, a Brazilian private equity firm, recently teamed up with Warren Buffett's Berkshire Hathaway to buy ketchup maker H.J. Heinz for $23.2 billion.
That deal was valued at a ratio of enterprise value to expected 2013 earnings of 14.6 times, a higher multiple than private equity firms generally bid.
Family vehicles are also now teaming up with each other, as in the case of the JAB deal for Douwe Egberts.
The Santo Domingo family, which made its fortune from beer, was a minority investor alongside JAB in the Douwe Egberts deal. Alejandro Santo Domingo will also become a non-executive member of the new board.
"We know these people for a long time," Bart Becht, CEO of JAB told Reuters.
"What works very well in working with JAB, because JAB is a family holding, is to work with other family holdings because it's much easier to agree on the long-term nature of our investments. JAB and its partners, we are looking at this as a 15-20 year investment."
Private equity firms, used to being the dominant force in consumer deals, are struggling to defend their territory.
"Private equity firms are very worried about this trend; it's cutting them out of the picture," said a sector banker.
The global market for consumer mergers and acquisitions, including food and drink manufacturers, has more than doubled as of early April, according to Thomson Reuters data, the best start since the go-go, pre-crisis days of 2007.
But private equity firms, which buy companies and try and boost their profitability by cutting costs or revamping them before selling them on, are losing out with just 17 percent of transactions by value carried out by them last year compared to over 40 percent in 2007.
"It's difficult to make the returns work on such high multiples especially against players with a longer time frame and a proven track record of paying up, it's difficult to crack work for PE," said one partner in a private equity firm.
The private equity sector has had a lean time since the financial crisis as the flow of cash from banks has virtually dried up making it difficult to finance billion dollar deals.
"At its peak, 60 percent of the wallet attributed to consumer was from private equity," said another consumer banker. "And the leverage they were comfortable with meant they could compete with corporates who just wouldn't use the same leverage. But that stopped like a light switch."
It has also been harder for private equity to meet their high return targets in the current low interest rate environment as investors search for yield, driving asset prices even higher.
To compete, bankers say private equity groups are going to have to become more flexible on deal structures and accept lower returns and longer investment times.
"It's a pretty ugly time for private equity. They are going to have to be more flexible and less predictable," said one banker, who advises on takeovers in the consumer sector.
(Additional reporting by Martinne Geller in New York, editing by Alexander Smith, Carmel Crimmins and Anna Willard)