Deal focus: COPE moves fast with Malaysia petfood play

Within weeks of COPE Private Equity’s investment in Malaysia-based dog and cat food maker Pet World in early 2021, the country went into a nationwide “total” lockdown, which included the so-called MCO, or movement control order. This was the second time a MCO had been declared; the first one ended up lasting almost all of 2020.

The economic damage during this period was severe. Gross GDP declined 5.5% in 2020 and 0.5% year-on-year in the first quarter of 2021. As of the beginning of 2021, the MCOs were said to have wiped out as much as 90% of domestic retail business. But not every segment was underwater.

“The pandemic was a pleasant surprise as many families decided to adopt pets as companion animals while stuck at home, generating a positive tailwind for the pet food industry,” Azam Azman, founder of COPE, said. “As a result, our forecast numbers were realised earlier in 2021-2022.”

COPE, which typically commits USD 5m-USD 15m per transaction, made two investments in Pet World in early 2021 and 2022 from its first and fourth funds. Much of the decision-making was based on having identified the category as defensive through economic cycles and benefiting from local uptake of a global pet humanization trend.

Azam points to industry data projecting the pet food market to grow 7.4% a year Asia-wide until it hits USD 26.1bn in 2026. In Malaysia, growth is expected to be 8.4% a year, bringing the market to MYR 1.2bn (USD 257m) by 2025 on the back of increasing pet ownership and a shift toward higher nutrition products.

“When underwriting an investment, we look for trends that continue beyond a single investment cycle, as potential buyers will, in turn, look for industry tailwinds during their investment period,” he said.

This scenario played out in just over two years with the recent exit of COPE’s entire stake in Pet World to Creador, a fellow Malaysia-based and regionally active PE firm. Creador, which writes cheques in a range of USD 40m-USD60m, acquired a 40% stake, which included COPE’s entire position plus shares owned by the founding family. Financial terms were not disclosed.

In addition to the resilience and momentum of the broader pet industry, COPE attributes the company’s appeal at the time of sale to value-add work around strategic planning, operations, and an expansion of the customer base. This included improvements in branding, product positioning, reporting, and data transparency, as well as enhanced corporate governance guidance and financial controls.

Pandemic-related supply chain disruptions were handled through supplier diversification and the exploration of alternative raw material sources locally. The most important development on this front was the construction of a state-of-the-art factory on the outskirts of Kuala Lumpur. This meant necessitated the recruitment of experienced manufacturing and R&D workers, and even a food nutritionist.

Going upstream was essential. Manufacturing was previously outsourced to overseas players, making profit margins subject to fluctuations in foreign currency. By the end of the pandemic, the ringgit had declined 25% versus the US dollar over a five-year period.

It also opened doors in terms of diversifying the product suite. Some of the standout launches during this period include a duck meat-based kibble from Pet World’s dog line ProBalance, a salmon and grilled mackerel-based variety under the cat brand ProDiet, a tech-savvy cat litter, and a premium cat brand called Delizios, said to be made with “human-grade” tuna.

Shortly after COPE’s second investment last year, Pet World teamed up with SPCA Selangor and Nutrition Technologies to create what was billed as Malaysia’s first sustainable dog food using black soldier fly larvae as an alternative protein source.

“Recognizing the need for ability and flexibility, the CEO focused on diversifying the company’s product portfolio,” Azam said, noting that exploring new product lines and adapting to changing consumer preferences mitigated the impacts of commodity price fluctuations related to ingredients.

“Product rollouts – from market research to formulation, design, marketing, manufacturing, and distribution – were a fun and unforgettable experience for the [COPE] team.”

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• Topics
• Southeast Asia
• Trade sale
• Expansion
• Consumer
• Malaysia
• COPE Private Equity
• Creador