Part I of Arbor Investments and the influence of private equity companies
To create this two-part series, L. Joshua Sosland, president of Sosland Publishing Co., met with the executives of Arbor Investments, a private equity firm that specializes in the food industry. The Arbor team explains in Part I how the company expanded from its humble beginnings to manage a portfolio of companies that together are as large as TreeHouse Foods. In-depth analysis of a crucial early blockbuster investment in the take-and-bake pizza market is included in Part II, along with an account of the challenges the company faced.
Chicago From the perspective of the food business, one tree has emerged as a standout among the many private equity firms that have sprouted up over the past few decades. Chicago-based Arbor Investments has been expanding and purchasing over 80 food or food-related businesses since the beginning of the century.
In the era of virtual/augmented reality, artificial intelligence, and other transformative technologies, how can a company that specializes in revolutionizing food production and distribution firms be relevant? For what reason does Arbor Investments just concentrate on food? As the company grows, will its success be sustainable?
Carl S. Allegretti, president, and Alison B. Miller, partner and chief marketing officer of Arbor Investments, were among the leaders who participated in a recent interview with Gregory J. Purcell, co-founder and chief executive officer. The answers of the leaders of Arbor Investment provide profound insights into the world of an increasingly significant source of funding and catalyst for change in the food business. Private equity firms are infamously secretive about how they operate.
From small beginnings, the company has expanded significantly. The cumulative yearly income of Arbor’s portfolio of firms was $65 million twenty years ago; now, that number is $2.6 billion. According to Mr. Allegretti, the 12 portfolio firms that Arbor now manages together would have the scale of a sizable consumer packaged goods company.
“Our yearly sales are $2.6 billion, and our EBITDA is almost $400 million,” he stated. “Our EBIDTA would place us ahead of TreeHouse Foods, for comparison.”
Over the course of the previous 24 years, the company has invested $2.3 billion in stock.
“We function essentially as a private equity-backed food conglomerate,” Mr. Allegretti stated.
Arbor Investments stands out from the few private equity companies with substantial food portfolios since its assets cover many food, beverage, and related industry categories and are not concentrated around well-known consumer brands. The portfolio comprises the following companies: Steelite International, tableware; Carnivore Meat Co., pet food; Concord Foods, food and ingredients; Crown Bakeries, baking; Golden Malted, waffles; Rubix Foods, flavors and ingredients; and Bradshaw Home, cookware, bakeware, and cleaning supplies.
Leading distributors and manufacturers of consumer packaged products, including as Nestle SA, Hormel Foods Corp., Colgate-Palmolive Co., KeHE, Sysco, and UNFI, have purchased previous Arbor portfolio firms.
Mr. Purcell, who co-founded Arbor Investments in 1999, started his career in Chicago’s commercial banking in 1988, not private equity. It was there that he had an epiphany regarding the food sector, which led to the founding of Arbor Investments. Regional food processing firms were a large portion of his banking clientele, and he gained an understanding for the appealing financial attributes of many of these companies via his due diligence on many leveraged buyouts and management buyouts.
He said that “the light finally went out on how leveraged and stable these companies’ cash flows are, and how these companies seemed to defy efficient markets.”
He said that if markets were genuinely efficient, many of the businesses he collaborated with would have generated large profit margins that, in theory, should have drawn competition.
“These were great at what they did companies, usually with less than $100 million in revenue,” he said. “They gave an outstanding performance. I came to see that many of these businesses are operating quietly.
By quitting commercial banking to work for Reyes Holdings, a beer distribution company seeking to diversify by investing in food firms, Mr. Purcell put this idea into practice.
He declared, “They were awesome.” “I was given a canvas by Chris Reyes to paint on. I went and acquired businesses on their behalf.
Four years later, Mr. Purcell departed Reyes Holdings to start making independent business acquisitions. A modest first investment seemed to confirm Mr. Purcell’s belief in the potential of the food industry. A Springfield, Missouri-based pickle firm that serviced many large quick-service restaurant franchises was purchased. The enterprise included of 1,000 tanks dispersed around a 29-acre area.
That was the beginning of, “Wonderful, you’re investing capital,” he recalled. You provide goods to international QSR brands. You witness firsthand the wonderful life that can be had as a supplier to a worldwide brand.
Mr. Purcell learned from the pickle industry that a well-managed, strategically positioned food firm can achieve success even if it prioritizes private label above brands. Using his inclination for entrepreneurship as a springboard, he
“We registered negative on the sexy meter when you looked at it,” he continued. Our opponent was a venture that wanted to take food.com public. “No, that’s not our strategy,” we said. Our goal is to dominate the market for the acquisition of US and Canadian food manufacturing firms.
Everything turned out okay. We are the market makers of today. There’s definitely an 80% brand awareness of Arbor Investments if you’re a private food firm with less than $1 billion in revenue. They are familiar with us.
After working for Deloitte for thirty years as chairman and CEO of Deloitte Tax, Mr. Allegretti joined Arbor in 2020. He remembered meeting Mr. Purcell at Reyes and later when he left to go it alone.
Mr. Allegretti remarked, “He bet on himself, and he won.” “That is the spirit of entrepreneurship that brought Arbor to life.”
Arbor’s tenacious history continues to help them land business, according to Ms. Miller.
“When we first meet, it resonates with entrepreneurs and founders,” the speaker stated. Greg is able to communicate with them as he is an entrepreneur himself. Greg says, “I understand.” I understand what it’s like to barely make ends meet.
Additionally, Mr. Allegretti stated, “Entrepreneurs don’t trust people.” Additionally, it offers us a competitive edge when an entrepreneur can interact with another entrepreneur.
Arbor Investments also benefits from the company’s targeted history, which helps with its due diligence.
“It’s difficult to fool us,” Mr. Purcell remarked. “We are familiar with all of their consumers, regardless of the CEO’s age, whether it 78 or 28. We conduct business with all of them, including McDonald’s, Costco, and Walmart.
According to Mr. Purcell, the company has been investing in people, innovation, and capital expenditures for decades.
“Every time, whether it’s plates, croissants, or pet food, we’re using the same playbook,” he said. As we age, we prefer to believe that we are becoming better. It’s greater understanding and error correction.
“Everyone has a voice, and in the beginning, we encountered numerous instances where the plants were in poor condition, they lacked the necessary food safety procedures, or we were unable to find labor—all of which needed consideration and funding as we were putting together our investment thesis,” the speaker stated.
Staffing adjustments are frequently necessary as well. Making such changes is difficult in any organization, but it’s particularly difficult in family-owned enterprises. According to Mr. Purcell, entrepreneurs regularly rely on Arbor to make the difficult decisions about leadership that are necessary to advance their businesses.
“It’s usually better if you make the change than me, Carl, as Thanksgiving can be difficult,” Mr. Purcell stated.
“It’s usually better if you make the change than me, Carl, as Thanksgiving can be difficult,” Mr. Purcell stated.
According to Mr. Purcell, Arbor Investments’ strategy for investing in portfolio firms is simple and covers everything from human resources to other fundamental tasks.
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“Carl begins every meeting for every company with the first page of the deck, which asks, ‘What is working and what isn’t?'” stated Mr. Purcell. “A 400-page McKinsey report doesn’t need to tell us what’s effective. We’re instantly putting 7,000 employees in our food company on the same page. The management team is sending out a clear message to each and every one of our coworkers at every organization.
“Talent, innovation, and CapEx are part of the secret sauce at Arbor Investments,” Mr. Allegretti continued. We also bring to the table something that businesses might not have given much thought to: their strategy. Where will we travel next? We have always prevailed in a conflict if our team and management can come to a consensus on our direction. Next, we discuss how we’re going to use our ability and creative ideas to get there. Everything is connected to a more comprehensive approach we are implementing for our investment portfolio.
Arbor Investments typically holds portfolio firms for over seven years. According to Mr. Allegretti, while pursuing transformative changes at the firms, a longer time horizon is frequently required.
He declared, “We always begin with the value creation plan and then move on to executing our plays.” “Our Arborists are long-term players. We eventually have to search for the next buyer as the expansion strategy is implemented, keeping in mind what is best for the company and, ultimately, our investors.