Value-add needed to navigate consumer boom – AVCJ Forum

There is a tendency to chase after companies that have experienced a rapid increase in growth momentum, which results in a faddish VC-style bandwagon where a more measured growth capital approach is needed, panelists said.

In the consumer sector, this often involves quickly multiplying sales and communication channels, as well as a rapid proliferation of stores with loss-making unit economics but high-growth gross merchandise value metrics. Aggressive capital raising is required.

“For us, the biggest counter is to look into the fundamentals of the brands,” said Michael Zhang, a co-founder and managing partner of China’s BA Capital. “We like to back brands that maybe would take longer to scale but have a robust business model that can build entry barriers in either supply chain or product or their solid operation of front-end channels.”

Chinta Bhagat, a Singapore-based managing partner at L Catterton, observed that consumer companies expanding rapidly with this style of business development also tend to enjoy strengths related to entrepreneur personalities such as compelling storytelling and good “founder intrinsics.” The challenge for private equity is to inject this DNA into sturdier businesses.

“You do find businesses, with pretty robust fundamentals, which lack some of these softer ingredients, which are not getting a pass from investors. And it’s even a problem for us because if we discover one of these but the rest of the world doesn’t, we’re left holding the business and we won’t have an exit,” Bhagat said.

“What we’re at spending our time on is what ingredient can we add to a business that may not be loved today to make it something that is more attractive to both the other investors and the capital markets. But infusing these softer elements is hard. There seems to be currently a divergence between the businesses that are loved versus not.”

The most straightforward suggestion for dodging rising valuations in the sector was to seek out companies that have failed to adapt to the post-pandemic environment and therefore failed to attract investor attention. Justin Ryan, co-founder of Australia’s Glow Capital described this approach as identifying companies that are stuck in old channels but that lend themselves to new channels.

“Many of these traditional businesses that might have agency arrangements around the world and might be tied up with brick-and-mortar networks can be very slow to move in their distribution structures,” Ryan said.

“But some of these businesses have great functionality and some of these brands have super reputations and extend-ability in the areas that they focus on; I’m talking more about niche brands. It’s really about identifying those opportunities particularly the ones that have been caught out in sectors that have turned down during COVID.”

The idea of finding bargains in quality companies experiencing difficulties was extended to include established international brands that have plateaued in their home markets and require help entering Asia. Karen Lai, a managing director at Hong Kong-based LionRock Capital, flagged a significant opportunity in backing incumbents.

“We’re seeing more emerging domestic brands in the consumer space in Asia, but we also believe there are many good industry-leading global brands in the consumer space that are undervalued. We believe that we can leverage our network and resources in China to help these global brands with little footprint in China and Asia to help them grow that piece,” Lai said.

“A lot of these companies may still be run by families where the second or third generation is not very interested in running the business. And in a home market like Europe, they may not have much growth. That’s where we see we can bring in value.”

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• Topics
• Investments
• Consumer
• Asia
• BA Capital
• L Catterton
• Glow Capital Partners
• covid-19
• AVCJ Events