Investors are drooling over food companies, pushing their valuations higher and turning up the flame on the IPO market. That has two local financial firms specializing in food companies getting ready for a feast.

Creo Capital Partners in Westwood is raising a new fund to boost its bundle of food businesses and roll them up for a potential IPO. And West L.A.’s Trinity Capital, an investment bank that advises on food and beverage and restaurant transactions, did 32 deals last year with a total value of $2 billion – one of its biggest years since the firm opened in 2000 – and said that it is even busier in 2014.

One factor fueling the appetite for food companies is that conglomerates such as Swiss giant Nestlé often find it easier to buy an innovative product than create it themselves. With interest rates at historic lows, they can borrow cheaply to make an acquisition.

Also, given the soaring success of food IPOs such as Denver fast-casual chain Chipotle Mexican Grill Inc. (its stock is up more than 1,600 percent since its 2006 market debut), investors don’t want to miss out on the next must-have item or hot restaurant.

‘Mad scramble’

“There’s a mad scramble both in product innovation as well as the majors trying to figure out who’s going to win and who they’re going to gobble up,” said Kevin Burke, a managing partner at Trinity.

Rob Holland and Gregory Bortz co-founded Creo in 2005 without any specific intention of getting into food businesses. Their first investment was in frozen-food company Oh Boy, which ended up being appropriately named – it was a massive turnaround that required the finance guys at Creo to leave the corner office and go into the kitchen.

“We went in and literally ran the business,” Holland said. “I was wearing a hair net.”

Even though it was hard work to get that company in the black, Holland and Bortz fell in love with the industry and worked up an appetite for more food businesses.

“The reality is, and we can admit this today, was that we had bitten off more than we could chew,” Holland said. “But it had a very happy ending because it led us to the food industry.”

Creo has invested in 14 food companies, mainly frozen-food businesses and food service companies, and still owns 12 that it’s combined in Flagship Food Group. Creo hired two veteran industry executives as managing partners to run Flagship at home and abroad: Gary Lim in North America and Russell Maddock in the United Kingdom.

The company just raised its third fund, which it plans to use to make acquisitions for Flagship with the hope of building it into a package large enough to take public. Holland wouldn’t disclose the size of the fund, but said it is targeting businesses with annual revenue between $20 million and $100 million.

Creo is one of several local investment firms that have carved out a place at the table by focusing on food.

Laurel Crown Partners in Westwood recently invested in Chicago fast-casual chain Native Foods Café. West L.A.’s First Beverage Group hired veteran food and beverage industry investment banker Nicole Fry last month to grow its team. In addition, Trinity has been very active helping investors sell and refinance their food companies in a favorable market environment.

Public option

Private equity firms that invest in food companies have two basic exit strategies: roll a few companies up and take the bundle public or sell to a strategic buyer such as Nestlé. Holland thinks the former makes more sense for Flagship.

“If we keep growing the business organically and through acquisitions, we’ve got a ripe candidate for an IPO,” he said.

However, Trinity’s Burke said a successful roll-up exit is more challenging than it used to be.

“Ten or 15 years ago, any kind of scale meant something,” he said. “Now you have to roll things up intelligently so that you’re rolling up some margin, some synergy and it’s not unwieldy.”

Flagship does $300 million in annual revenue, 40 percent of that overseas. It includes brands such as frozen-food makers TJ Farms and Lilly B’s as well as sauce company Chris & Pitts BBQ.

Holland believes that level of diversification makes it a legitimate IPO candidate.

“The companies trying to sell to Nestlé or whoever are probably developing a single brand,” he said. “They’re trying to invent the next specialty drink or specialty bar. We’re going in a different direction.”

It’s the path chosen by New York private equity behemoth Blackstone Group, which acquired frozen-food company Pinnacle Foods in Parsippany, N.J., in 2007 and took it public in March of last year. Pinnacle’s stock is up 36 percent since the IPO.

According to data from PricewaterhouseCoopers, the second quarter of this year was one of the strongest periods for retail and consumer product IPOs in the last three years, with 13 offerings totaling $4.9 billion. Total deals were up 117 percent compared with the second quarter of last year and the total dollar value was 136 percent higher. Fast-food chain El Pollo Loco Holdings Inc. in Costa Mesa, with shares up 81 percent since its July 28 IPO, is just the latest food company to take the public markets by storm.

Strategic buyers

But if going public isn’t the right choice, another option is selling to a strategic buyer such as Nestlé, which can also mean an extremely lucrative payoff. Burke said a purchase by a company like that gives access to its distribution network, which could double sales of any given food product without any new overhead expenses.

“The company is worth twice as much in the hands of Nestlé,” he said.

Because of this growth potential and synergy, a strategic purchaser such as Nestlé is often willing to pay more for a good product than a strictly financial buyer such as an investment fund. That’s pushing valuations of food companies higher, motivating owners to sell – and driving business to advisers such as Trinity.

Burke believes companies such as Creo that specialize in natural or organic foods are especially attractive targets as shoppers buy less soda and more tea and juice. It’s hard to predict what Americans end up developing a taste for – who knew Sriracha would be this popular? – but according to Bob Woolway, a managing director at Trinity, following private equity money might be a good place to start.

“There’s kind of a cadre of these private equity guys who focus on food and beverage,” he said. “They’ve got a pretty good track record of picking the winners.”

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