A focus on structural trends and the application of value creation playbooks can drive success in a cyclical consumer market, says Maxim Crewe, partner and head of the consumer and financial services sector teams at Cinven.
The consumer sector’s dynamism and often highly contradictory nature makes it exciting for investors. Consumers’ tastes constantly change, so the Cinven funds look to invest in longer-term trends in behaviour and demographics that will shape markets over decades.
Behavioural trends include the shift towards experience over goods, an increasing focus on health and wellness, and the growth in the pet market. Demographic trends take in wealth polarisation, ageing populations and the more eco-conscious consumer.
Our approach
We mitigate the consumer market’s cyclical nature by looking for long-term trends – or mega-trends – that support structural growth throughout the cycle. And we assess any potential investment against inflationary, deflationary and recessionary pressures. With this lens, we tend to favour:
• Smaller-ticket consumer products or services with repeat-purchase models
• Differentiated consumer propositions with robust pricing power thanks to strong brands or high-value service models
• Companies down the value chain where we can create value one or more steps away from the consumer
Mega-trends over sub-sectors
The Cinven funds look to invest in mega-trends – health and wellness, for example – over sub-sectors. We then look for business models or groups of companies focused on a particular niche – verticals – that create an attractive opportunity. Fresh berry research and development company Planasa, which the Cinven funds exited last year, was a highly successful example of this, and this summer we reached an agreement to become the lead investor in Vitamin Well.
As a plant breeder, Planasa sits in a high margin of the value chain. Vitamin Well has a very different business model but has three strong brands across three sub-sectors that play to our wellbeing mega-trend focus.
What’s in it for LPs
With the consumer sector representing half of European GDP, according to the EU, and a fifth of European deal value on average, it’s an area that’s almost impossible to ignore. While some of our peers have exited it, we’ve been a consistent investor for 30 or 40 years. Limited Partners (LPs) like that – it shows we’ve been through several cycles and have developed appropriate strategies.
The playbook
We’ve developed a playbook to help the Cinven funds’ consumer investments accelerate the opportunities in front of them to become market champions. It focuses on:
• Talent – backing existing resources and helping bring in new talent to augment teams
• Digitalisation – from applying artificial intelligence to data analytics
• Buy and build
• Consolidating fragmented markets
• Internationalisation – taking local champions and driving growth abroad
• Environmental, social and governance (ESG) as a differentiator
The playbook in pet care
First: five years ago, the Cinven funds invested in Partner in Pet Food, a regional champion we’ve helped build into a European leader using the following value-creation levers:
• Bringing in new talent
• Driving international expansion
• Expanding and improving the product portfolio
• Acquiring other pet food manufacturers
We’ve now agreed to sell a majority stake but will remain a shareholder to benefit from future growth.
Second: the Cinven funds invested in Arcaplanet, a chain of pet-related stores we quickly turned into Italy’s largest pet care omnichannel specialist. This time, the value creation levers were:
• Digitalisation
• New stores
• New products and services
In July 2024, we agreed to sell our Arcaplanet stake to a leading European pet supplies business, Fressnapf. In connection with the sale, we agreed to make a significant investment in Fressnapf to benefit from future growth.
The macro outlook
Looking ahead, we see a better consumer backdrop, with inflation stabilising and an improving interest rate environment. This will help to increase consumer confidence over the next 24 months. Though our investment strategies are almost completely agnostic to the macro environment, an improved consumer environment is more conducive for getting deals done.
As for the competitive landscape, its cyclical nature has forced out a number of players. But we focus on consistent returns – and our strategy is to have a fund diversified by sector and geography, including consumer, as it’s certainly possible to deliver attractive returns by focusing on structural long-term growth.
This interview was published first on PEI Private Equity International – read the complete interview.
