Aníbal Montes | WM Partners

Private equity powerhouse on its recent acquisition of functional foods business Vega and why top and bottom line growth is crucial for M&A

Having caught on early to the thriving health and wellness trend, private equity powerhouse WM partners is exploring acquisitions in three subsectors of the space, with the aim of building out businesses and ensuring they are operationally sound and easy to integrate for CPGs and other large acquirers to snap up.

Investor relations and business development associate Anibal Montes has a keen eye for the shifting focuses of major CPGs in the food and drinks space, and is certain the move towards a more health-conscious and low-sugar diet is fully in motion among consumers.

Montes sat down with NutritionInvestor to provide some insight into WM Partners’ latest acquisition and discuss where he sees consumer and industry M&A trends going next.

What’s your investment mandate at WM Partners and what sectors are you looking at specifically within the health and wellness category?

WM Partners is a private equity firm that solely focuses on the health and wellness sector, specifically in the natural consumer health subsector, where we seek to make middle-market buyout acquisitions of brands that are leaders and have a strong brand equity in this space. Most of the brands we acquire with the intention of being highly involved operationally to build them. So, it’s a buy and build strategy where we try to create as much value as possible through an operational hands-on approach.

What we’ve done since Fund I, and now with Fund II, is look at subsectors within health and wellness that we believe are highly fragmented, highly defensive and have fast growth or very sustained growth. What we’ve seen is the space has been growing at over 8% CAGR since 2005. And the industry is expected, at least in the US, to reach about $300 billion in sales by 2025, according to Nutrition Business Journal.

With that growth at 8% CAGR or higher, especially after the pandemic, we’ve seen accelerated trends within this space, and we try to target those different trends with the subsectors of focus that we look at. There’s three that we’re currently looking at, for example in Fund II we’re looking at functional foods, which are your typical superfoods and ingredients that tend to have natural enhancers or provide some sort of additional support to your body.

The second subsector is natural personal care, which we believe is also experiencing strong growth. We believe that consumers continue to search for natural, organic and responsible brands that provide personal care products that are not using harsh chemicals or harsh ingredients for the body. So, we do see natural personal care as a strong subsector to be looked at further.

Finally, we’re looking at natural over-the-counter remedies. We believe that brands have realised that consumers are looking for natural ways to replace medicines that typically are full of chemicals and are looking for the best way to get better or avoid getting sick in a more natural way.

We’ve been focusing on all three subsectors, but so far, including our latest deal for Vega, Fund II has made five acquisitions in the functional food subsector. What we’re trying to do for Fund II is build a platform for each of those subsectors.

Why have you primarily focused on functional foods businesses over the other subsectors you just outlined?

Our experience based on recent deal flow has shown us that there are a lot of brands in the functional food space that are coming to market looking for added growth and partners that can help them achieve that next level of growth, whether it’s by increasing their market share, improving their operations, or by simply partnering with a firm like ours that helps them think through all the challenges to grow the brand.

It’s almost a coincidence that all the brands we’ve acquired are in the functional foods space because we do have a robust pipeline that looks at opportunities in each of the three subsectors I spoke about, and it just so happens that we’ve pulled the trigger on those deals that we believe had the right brand, the right growth, and the right team. And obviously the price was right.

We’ve looked at over 750 companies since founding Fund I and we’ve only made nine acquisitions. Our investment approach is very disciplined especially nowadays when we have been seeing valuations skyrocket.

How has your approach to investing in and helping build a company changed in the case of Vega, which was a divested business arm of CPG giant Danone’s?

Because of Vega’s size we understood that the operation was larger than any other company we’ve acquired in Fund II. In Fund I we built and sold Nutranext, a company with similar revenues and a highly efficient operation. So, when looking at a company the size of Vega, we immediately analysed where the opportunities lie when it comes to operations and the market that it is targeting.

Understanding that Vega is known as the pioneer of plant-based nutrition since 2001, we want to make sure that the team is strong enough to continue to drive and take the company to enhanced levels of growth. We intend to reinforce the team if required, but at these types of established companies, we believe it’s more a matter of realigning the strategy vision and protecting the culture.

We’re seeing a lot of new market participants in the form of acquirers or buyers coming into play and paying significantly more than what the market has called for. To give you an example, from 2007 through to 2011 we saw the median EBITDA acquisition multiple being less than 10 times. Nowadays, based on our bidding experience, the same type of companies, of the same size, are driving valuations upwards of 14 to 15 times EBITDA.

And in some cases, buyers are buying at multiples as much as eight times sales. One of the things that we’ve been able to do is acquire most of these brands at attractive multiples that we believe are below the current market.

Do you expect the clean and functional ingredients market segments to grow further? And what are you seeing in terms of investment trends in the space?

We believe that consumers are interested in finding out the source of the ingredients in their food and products, so sourcing transparency is going to be key for health and wellness. More and more we’re seeing consumers going after plant-based products and we believe plant-based is going to continue to drive strong demand from the consumer. We also believe that low-sugar options and sugar alternatives are key trends for health and wellness.

For example, PepsiCo recently announced the sale of its Tropicana business, which we believe is likely the result of consumers searching for low-sugar brands and options. According to The Wall Street Journal, sales in its juice products were declining significantly and it has to do with this trend I believe. Another example is Coca Cola said that Coke Zero would be its highest growth driver in 2021. The Hershey Company also announced it would release several no sugar candy products.

One of our Fund II portfolio brands, Ultima Replenisher, which we acquired in 2019, is a low-calorie, low-sugar hydration brand and it has grown sales by over 300% since acquisition. We believe that all these metrics confirm that low sugar will continue to be high priority as well as plant-based alternatives and transparency on ingredients.

We think that the natural consumer packaged goods industry in general will see that CPGs and large strategics are searching for later-stage brands with a continued focus on profitability, growth potential, and how the brand fits into their overall playbook.

We also believe that acquirers are interested in wellness brands targeting specific demographics such as the millennial mum and baby boomers, and consumers looking for brands with a mission-driven focus. We also believe that acquirers are looking for brands that have a strong digital presence and online sales.

Based on our portfolio company ownership experience, we are seeing that consumers continue to be highly involved in e-commerce purchases and the pandemic has certainly accelerated how our brands do business online and how effective they are with their e-commerce platforms.

In terms of financials, we think it is important that not just the top line but also the bottom line is growing. We’ve seen examples of brands investing in the top line only, meaning they’re trying to spend as much on marketing as possible just to ramp up their sales. We believe there is strong performance of the brand when we see both top line and bottom line growth.

Lastly, we believe that companies and brands that have local supply chains generally will have less risk of disruption from shocks in the market, whether it’s public health issues like the pandemic, trade and trade wars that we’ve seen before, or natural disasters which seem to be happening more frequently.

All of that is disruptive to an industry that is connected globally. Ultima Replenisher did not have any significant negative impact on its supply chain during the pandemic, which we believe is because its operations are based locally in the US.

How you determine the best exit strategy for your portfolio companies?

We believe that some larger buyers in this space are looking for growth that would align their product offerings with current consumer trends. But we believe that it’s challenging for these big CPGs and acquirers just to simply go after small brands and try to integrate them successfully to be able, eventually, to move the needle in terms of growth and performance.

We believe that what really moves the needle for them is buying a platform with streamlined operations that are relatively easy to integrate into their own operations.

We think this was a consideration of the Clorox Company when we fully exited our Fund I platform to them. We see our job as making these larger acquirers’ lives easier by buying and building a platform that is attractive enough for them to acquire.