Consumer PE is dying/dead?
Besides tech/software PE being impacted by AI, which other sectors in PE are also struggling?
Seems like consumer is #2 on the PE sector struggle list. Many consumer brands are trendy/fad-risk prone and rely on significant, continuous marketing spend to acquire customers. Less areas for actual real product or service differentiation outside of branding/marketing. Easier for new competing brands to be created plus the threat of cheaper alternatives sold on Amazon. Consumer sentiment can change quickly - what's a hot brand one year can be not hot in another few years. In addition, LPs seem to be shifting away from investing in the sector (outside of parking money at the big GP names like TSG and L Catterton).
Based on the most helpful WSO content, the consumer sector in private equity does face significant challenges, making it a tough space for investment. Here are the key reasons why consumer PE is struggling:
Trendy and Fad-Risk Prone: Many consumer brands rely heavily on trends, making them vulnerable to shifts in consumer sentiment. A brand that's popular today can quickly lose relevance in a few years.
High Marketing Spend: Consumer brands often require substantial and continuous marketing budgets to acquire and retain customers. This reliance on branding and advertising leaves less room for differentiation through actual product or service innovation.
Low Barriers to Entry: The consumer sector has relatively low barriers to entry, making it easier for new competitors to emerge. This is compounded by platforms like Amazon, which enable cheaper alternatives to gain traction quickly.
LPs Shifting Focus: Limited Partners (LPs) are reportedly moving away from investing in the consumer sector, except for established General Partners (GPs) like TSG and L Catterton. This shift reduces the capital available for smaller or newer consumer-focused PE funds.
Economic Sensitivity: Consumer sentiment and spending are highly sensitive to economic conditions, inflation, and other macroeconomic factors, adding another layer of risk.
Valuation Challenges: Many consumer brands struggle to scale profitably, especially in the Direct-to-Consumer (DTC) space. As highlighted in distressed investing discussions, brands like Casper and Glossier have faced financial trouble due to unprofitable growth and valuation mismatches.
While tech/software PE is impacted by AI and automation, other sectors like retail apparel and growth equity are also facing headwinds. Retail apparel, for instance, struggles with unpredictable quarter-to-quarter performance and intense competition. Growth equity is being squeezed by both smaller firms scaling up and larger firms moving downstream, creating a challenging environment for mid-sized players.
In summary, consumer PE is indeed facing significant struggles, and the challenges are compounded by broader market dynamics and LP preferences.
Sources: Basic Overview of the Consumer Sector, Distressed Investing: This Time It's Different, Long term, concentrated, deep fundamental investing, Distressed Investing: This Time It's Different, Q&A continuation: Debating Trends in Lower Middle Market PE with the Founders of Nextvest
I wholeheartedly agree with this, and think it's well-documented on this site. I think it's much harder starting out today to establish a long-term career in buyout consumer-oriented PE. You're battling a lot of headwinds and dealing with limited/shirking spots and uncertain future dynamics. Won't list them all.
Another thing to consider. For alot of these consumer subsectors (e.g. food), the founders are often thinking VC/growth and then straight to large strategic exit. So the "middle part" of the value chain where you'd typically see a MM/UMM PE buyout has gotten squeezed out of the equation. There's a very narrow strike zone for it and often just makes it harder to do conventional LBO on those things.
Yes TSG and LCat are the exception they rely on their heritage/reputation to attract founders. But I don't think there's anything super special going on there beyond that.
Agree the fundamental goodness of the business model in the consumer sector is tricky relative to others but I think that is largely reflected in the relative valuations of these businesses relative to other sectors. Growthful businesses acquireable in the 8-12x EBITDA range which is a significant discount to other sectors.
I think the fan of outcomes on a consumer deal is wider but that skews to the upside and downside. Plus a number of investors have left the sector which obviously generally creates opportunity. Puts and takes though
Plenty of people are making money in consumer right now. It was always generalist funds that half-assed it and didn’t have consumer experts opining in IC that are struggling. Everyone thinks they are consumer investors, because everyone is a consumer. This couldn’t be farther from the truth. Most of the sector specialists are doing well, and consumer services broadly has been extremely successful over the past decade. Yes, there’s been some slowdown in random DTC products / e-commerce with crappy to begin with unit economics and apparel, mostly due to CAC inflation, but multi-site, pet, franchising, sports, consumer services, travel among others have a number of big winners. The category has always been hallmarked by a wide range of outcomes (similar to VC/ growth investing). The resiliency and scale of the US consumer is effectively unparalleled. The largest GDP contributor in the US is the consumer, and there will continue to be opportunities for investors that actually understand how consumer behavior works vs random funds throwing money at whatever “hot” brand - that is only the tip of the iceberg of opportunity sets when it comes to consumer investing, and is typically only reserved for smaller(ish) checks acting as a lottery ticket to realize a grand slam and pull the fund into top decile. Those that have exited, good, let them exit - they probably didn’t have a right to win anyways.
Thanks for the perspective. Not to challenge you, just out of interest as someone not in PE at all - who are the sector specialists that are doing well?
Welcome 10yrs later to the party. Yes, trad consumer PE is likely screwed. You'll have a few firms that do ok, but it'll hardly be the place for great returns. Regular software PE is going the same way. The trad LBO buyout model is seeing a shrinking TAM in terms of attractive verticals, with record dry powder / capital....and the capital in those worsening areas of PE will shift to the better areas (i.e. higher purchase prices in other areas --> even more compressed returns). Makes 0 sense to build a fresh career on LBOs if you're starting today
interested where you would start your career today. Easy to say tech/AI with hindsight, but my question is generally geared more towards finance.
You can make money in consumer but it’s hard for PE to do correctly. (1) building a consumer business takes time, the longer it takes to build a brand, distribution, footprint, the more durable it is (Lindy) and (2) private equity playbook works when barriers to entry are high and stay high, so cutting costs / taking price stops working when distribution costs go down and/or marketing is easier both of which have been true for last 10 years.
Most PE firms making money in consumer are basically just hedge funds flipping assets before “peak” and trying to cash out. Anyone who thinks an MF / UMM are doing something different / unique is delusional.
Lastly, consumer macro has been bad. Real wages have been negative for 5+ yrs. We are finally seeing prob flat or less negative real wage growth b/c of the data center boom for the middle class (the real middle class who do real jobs, not the mouse jigglers making $200K in NYC that think they are middle/working class). In this macro environment the only two business models that are working are scale economies shared (price leader - WMT, AMZN, etc.) and boomer/asset owner-beneficiary businesses (luxury travel, live events, cruise, high-end dining, business class on an airline, etc.). The other stuff that’s “working” is just catching a cycle of something or another. Building an enduring brand takes a decade or more, maybe even longer given how short attention spans are now.
Who are good consumer PE firms then?
Many of the hottest consumer startups in the last 8-10 years have been picked up by strategic acquirers versus PE for good reason
Largely agree with what was already said in the comments. Nothing too profound to add. I am in the space and will never pass on the opportunity to add my 2cents:
First, it's important that we don't conflate consumer with branded consumer. The broader consumer space is one of the most diverse, variant and interesting industries with enough dynamism that the range of outcomes on both the investing and operating side is immense. Think about the broader consumer business space as the businesses that create consumer surplus through experiences, products and services, and then capture profit pools. Everything is downstream of creating consumer surplus. Bridge that to the value chain: raw goods / commodity-like suppliers → finished goods, "complex" suppliers / co-manufacturers → the consumer brands providing the good or service we eat, drink, experience or derive utility from → the commerce interface connecting the consumer to these businesses → the ultimate consumer, which differs across businesses models / end-markets. Branded consumer is just one node (heavily weighted in our minds but just one node). And some of the most profitable, cash-flow generative, moated and important businesses in the world sit across this chain: Apple, Amazon, LVMH and Hermès, Costco and Walmart, Ferrari, Coca-Cola, GEICO, AutoZone and O'Reilly, Planet Fitness. Widen the aperture / lens and you recognize that a meaningful share of the small amount businesses in the world that create sustainable economic value are fundamentally consumer businesses.
Now, branded consumer businesses that experience fad-risk or that were created to capture a trend rather than a long-term, understandable behavior are cycle-driven. Cycle-driven businesses are not defined by long-term secular growth and profit expansion. So, when investors mark down these boom / bust companies (akin to gambling in some regard), I can understand and appreciate why an LP would pull capital away from these "investors". The space is extremely competitive, private label is real and there are a multitude of reasons why these businesses struggle to qualify as levered investments with defined, short-term hold periods. The reason consumer investing is so difficult has everything to do with the dynamism in outcomes and absolutely nothing to do with the fact that it's consumer.
It is genuinely hard to gain conviction (underwrite terminal value) in a branded consumer business which is why there are only a handful of pure-play branded consumer private investing firms. That doesn't mean there aren't outstanding consumer investors. L Cat, 3G Cap, TSG, Stripes, LGP, GA, Roark, BX, KKR, VMG, Bain, Advent, Sycamore, Prelude, Platinum, H.I.G., Warburg, Monogram, BC and so many spin outs (Forward, Prelude) all investing in consumer but with different mandates, check sizes, spectrums for control-to-minority , appetites for growth versus value versus turnaround (not a clean split), definitions of what constitutes a moat, different hold periods, structures and so forth.
Private capital that is undifferentiated, uneducated, short-term oriented*, untailored and inexperienced will always lose to the inverse, across every sector. That dynamic is exponentiated in a space with extreme degrees of change, evolution, fungibility and dynamism, which is also what makes consumer an alpha frontier. The fact that it's so difficult to gain conviction, so disadvantaged to enter, so complex to model and so hard to have true edge as an investor is what makes it rich in opportunity.
Also -- don't forget that consumer branded investors are some of the most shrewd, competitive and returns-driven people you will ever meet. It seems "nice" to invest in "the next generation of consumer brands", but the reason firms like L Cat built what they built and drive repeatable success has to do with the fact that they i) rigorously underwrite businesses, ii) take a clinical, data-centric approach, iii) operate businesses hand-in-foot, iv) have an immense repository of like-for-like investments, learning moments and value creation plans to draw on, v) structure deals with a ruthless emphasis on capital preservation, vi) align incentives with stellar management teams and vii) are “kingmakers” with a connection base that really does drive outcomes (this is admittedly loose, happy to expand here). The best founders / operators want to partner with those firms; they want dollars from those firms. LPs want access to these founders / operators. This mutualism exists and is why the best get better.
I have come to believe that broader consumer investing will continue to be an alpha-rich / interesting space to partner and invest in founders / operators. My hope is that people who read the provocative headline on this post are not dissuaded by exploring / pursuing consumer or branded consumer investing. Instead, think twice about whether any private investing firm you are interested in has the aforementioned characteristics or "right of win" in a rapidly sobering economy and tempered investing environment.
Thanks for your response and very interesting points you bring up.
1) Completely understand your thought process on the first point, but again what you are arguing here is that business models with poor moats (low to no product differentiation, low visibility in top-line growth / go-forward expectations, and poor business health, etc.) are challenged investments which I agree with. I would also find it difficult to invest in a consumer products, DTC-only, food business with the mentioned characteristics.
But since we’re picking examples, I would find it rather easy to invest a consumer products brand that returns 3 times the amount on every consumer it acquires over a large sample size and long-enough time period (sub-sector dependent), has a protected, patented portfolio of products that are synergistic with one another (i.e., the consumer benefits from owning multiple of these products), has a captive community of enthusiasts who act as extensions of the brand ethos and feel personally connected to the brands, maintains a strong but independent base of suppliers / co-manufacturers that allow the business to scale with a backboard (i.e., lower NWC requirements), prioritizes innovation and re-invests in organic growth opportunities that expands / bolsters both the existing and prospective end-markets and transforms these characteristics into a moat that they have proven and derive free cash flow from.
On the services side, an agri-business that supplies McCormick, Kraft, Conagra, etc. will also have long-term customer contracts / recurring revenue.
My point isn’t to be an ass here, but there is this common heuristic that consumer product businesses look a certain way and have an embedded list of attributes. What you mentioned can just as easily be flipped on a healthcare services provider that used to benefit from proprietary access to customer data, regulated controls, a slow-to-change customer now competing with a different, maybe “AI-enabled” provider (threw up in my mouth writing that) that offers betters capabilities at a lower price. One can reasonably imagine that first provider will find that there is potential for a degradation in its profit centers (even if it has IP, even if there is an existing long-term contract [rarely do these extend to a period long-enough that makes competition risk completely evaporate]). Now, if you were to ask me if I think the substitution risk, disintermediation risk and competition risk of an undifferentiated consumer products business is higher or lower than an undifferentiated healthcare products business, I would generally agree that there are inherent industry characteristics that make the second option face less of the mentioned risk than the first option.
2) I agree with the second sentence, disagree with the two examples you listed on the first part (predicated on relative industry returns, not relative PE returns) and will try to get at why I think the third sentence is happening (yes multiple consumer funds in larger platforms have shut down),
As a backdrop, my pre-set assumptions are i) scale and size are first and second order disadvantages to private equity returns, ii) over a long-enough period of time, LPs will pool towards the right-tail of performers while also allocating their portfolio across sectors (the allocation calculus for an LP vs GP are different, a PE firm to some extent can experience volatility, an LP to a larger extent can’t), iii) generalist, unspecialized investors will lose over a long-enough period of time to a specialized investor if they compete in the specialized investors space and iv) specific to your statement -- when you use the word “safer” you are implying there is a lower likelihood of capital loss which is just rationale for point (ii).
You are right that some of the PE funds’ consumer arms I mentioned are underperforming but my immediate questions back would be 1) are they underperforming to private equity returns as a whole or to other consumer funds (if the former, you’re gonna hate to hear where the S&P returns are coming from, if the latter I would just be surprised / taken aback if an LCatt / TSG underperformed a non-dedicated consumer fund [again one of my mentioned assumptions (iii)]), 2) what is the funds value prop to LPs (i.e., can an LP with a min. $100M+ investment check get exposure to consumer PE without potential of capital loss (assumption ii and iv), would imagine LCatt is one of the better places to park your money at than X MF), 3) did these funds have the talent, capabilities, focus, capital and experience to win in consumer investing in the first place and 4) is the reallocation more attributable to the PE firms specializing / pooling their money towards better returning and performing funds.
Sorry man not buying the AI sales pitch. Most of your points undermined your own argument. And yes if you broaden “consumer” enough and focus more on end-markets then every B2B2C business is a consumer business. But that is fundamentally not the spirit of this conversation.
Also most of this is a super fancy long-winded way of packaging a very down-the-middle super vanilla private equity 101 strategy that a college freshman would read about it. There's nothing differentiated about anything being said.
Agree that L Catt / TSG will continue to do 'well', attract awesome founders, and partner with really cool brands that make for good headlines. They've built the engine and it's a self-fulfilling prophecy now with their reputation. Rich get richer.
However we are providing generic generalized thoughts on this forum to strangers without knowing any person's specific interests / motivations. And all all-else-equal, I think there is significantly less opportunity for a junior PE professional in MF/UMM/MM consumer PE than there is in other sectors. And I think if you do "consumer", you will actually pretty quickly get steared towards an "off-shoot" of true consumer investing, for example residential services, food&beverage manufacturing - all of which I would consider to be more services/industrials investing but may get labeled as XYZ depending on the firm's investment philosophy and how they market stuff to LPs.
In consumer PE and would agree with this assessment moreso than light23's assessment (but appreciate reading his perspective). Curious to hear more people's thoughts, especially if they've touched consumer PE/IB
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