Most private equity firms this year have been cooling down on their shopping spree in the consumer staples sector. This is comprised of such companies that sell and manufacture goods that are purchased for immediate and everyday usage, and all of this is happening at a time when there is ongoing volatility in the financial markets.
Talking of this year, most Private Equity firms have participated in almost 121 buyouts in the consumer staples industry, which mostly consists of food, beverage and personal and household products, which are actually worth $14.2 billion as per data by a top media house. This also represents an almost 32% downward spiral from last year during this same period. The highest deal value had been in the year 2018.
Food products saw the sharpest decline, and here the deal value had fallen to $6 billion this year in 2021. Experts say that this slowdown is owing to a series of factors which include supply chain issues, the constant and increased pressure on private valuation, and also the tightening of the credit market.
They (the experts) further hold the opinion that they are seeing a gap in valuation that has been developing between the buyers’ and sellers’ expectations, and this is one of the key reasons for a lot of transactions not closing. Mostly both the buyers and sellers wait for the volatility to recede. Few people in this space are of the opinion that there might be some stability towards the end of this year, however, nothing can be said for certain due to the ongoing uncertainty in the market.
Also, there have been tight credit conditions both in the leveraged loan and junk bond markets, both areas which most private equity firms like to tap, leading to some deals not closing.
Consider, for example, the Reckitt Benckiser Group which had been struggling hard to sell its infant unit owing to a disagreement in valuation, and a shortcoming of available funds. In this case, there were only a handful of private equity investors that were ready to bid.
Having said all of this, it must be noted that investors have actually taken a back seat, in fact, there are immense opportunities that the private equity firms have been looking up to. Most investors say that those kinds of companies that are able to keep up with a supply chain that is resilient are being valued by them (investors) more than the others that operate in the market.
Some of the experts in the private equity space also share the view that some of these PE investors at this point in time would be more tilted towards conducting roll-up transactions. This is where the investors would consolidate a lot of organizations into an entity which is much larger, and now they would not just be acquiring new platforms.
They (the experts) even say that it is mostly in times like these that more and more people seem to focus on their own portfolio, and are most likely to invest within their portfolio, and not try other platforms.