Pandemic may boost private equity investment in pet food
The COVID-19 pandemic devastated whole industries, but pet food wasn’t one of them. Instead, as the pandemic continued killing people worldwide, pet owners tended to stay home, even without lockdowns. U.S. pet adoption rates increased early in the pandemic, and pets’ in-home companion roles became more important than ever. At the same time, e-commerce allowed pet owners to purchase pet foods without leaving the safety of home. Subscription services and direct-to-consumer sales likewise keep pet food brands going. For those reasons and more, the pet food industry may see increased interest from private equity investors, who already had their eyes on animal care.
Survey on private equity investment in animal care
The law firm Katten Muchin Rosenman surveyed both private equity and animal care professionals in May. Fully 90% of private equity respondents considered animal care an attractive investment target. Seventy-one percent expect private equity investments in animal care to increase during the next year. That investment may grow by more than 10% if more than a quarter of respondents prognosticated correctly. However, not all areas of animal care may receive the same level of attention.
“Some important takeaways emerged when comparing the responses about investment opportunities from private equity and animal care,” Kimberly Smith, co-chair for mergers and acquisitions and private equity at Katten Muchin Rosenman, said. “At a high level, COVID-19 has made animal care’s position even stronger, with 68 percent of private equity respondents saying COVID-19 has at least somewhat positively impacted the sector. Simultaneously, 61% of animal care respondents are more open to private equity since the outbreak of COVID-19. On a more granular level, private equity was generally more bullish than animal care respondents, except for telemedicine/telehealth and in the area of premium/dietary-specific food,”
Compared to other areas of animal care, premium and dietary-specific pet food rated lower as an investment opportunity among private equity respondents. Other sectors included therapeutics and diagnostics, technology products, pharmaceuticals and vaccines, telemedicine/telehealth, and basic veterinary care. All of these seemed greater opportunities than premium/dietary-specific foods.
“While 11 percent of total respondents told us that premium/dietary-specific food represented an investment opportunity in animal care over the next two years, only 4% of investors felt that way compared to 17% of animal care executives,” she said.
However, even though investors might not be looking directly at pet food as intently as other animal care sectors, the categories have cross-over that may provide an opportunity for pet food and treat producers.
“We asked respondents what areas represented the greatest investment opportunity for animal care in the next two years and the overwhelming response at 42% was therapeutics and diagnostics,” Smith said. “Of those who selected therapeutics and diagnostics, 60% said an interest in preventative wellness contributed to their selection, and 40% indicated the ‘humanization’ of pets contributed to their choice. That means there’s an opportunity for pet food companies to create products that aid in preventative wellness measures or the ‘humanization’ of pets.”
Pet food industry during and after the pandemic
The pet food industry may have weathered the early pandemic well, but the overall social and economic conditions mean dangerous uncertainty remains for both pet food companies and investors.
“Even though the sector is strong and resilient, we should throw in a few notes of caution -- given that COVID-19 is such a shock to our economic system,” she said. “One executive, in an open-ended response, said, ‘We worry about the current economic climate as it relates to the COVID pandemic.’ Another said, ‘It is unclear as to how distancing and safety measures will impact productivity.’”
Once a vaccine comes along, those executives' fears may be reduced, but private equity’s interest in pet food likely will not decline.
“The animal care sector has been a favorite target of private equity for years, due in large part to low risk, good returns and relatively light regulation,” Smith said. “So, even with the development of a vaccine or treatment for COVID-19, I expect we’ll continue to see optimism for animal care investments going forward. We should also see a temporary spike in the revenue of the general veterinary practices, many of which say that pet owners are currently delaying non-emergency check-ups and services due to COVID-19.”