Inside a cross-border private equity deal

Why Fengate's acquired a US-based food company and what that can teach us about alternative assets

Inside a cross-border private equity deal

On Monday, Fengate Private Equity announced the acquisition of the US-based Saco Food Holdings, LLC. Saco is a portfolio of US brands, offering products like confectionary chocolate coatings, sun-dried tomatoes, instant dry milk products, and a wide range of other food items. This was the first cross-border move for Fengate — a 50-year-old Canadian asset manager that expanded into private equity in 2016. The nature of the acquisition shows some of what the asset manager wants to provide investors with amidst a challenging economic environment.

Jennifer Pereira, managing director, group head of private equity at Fengate, spoke to WP about the deal and explained why they elected to acquire Saco. She highlighted some of the mechanics of the deal and put the acquisition in the wider context of what Fengate wants to provide to investors and advisors.

“Saco is a business that does well in times of economic uncertainty. We saw that in our diligence. Both through the pandemic and the spike of inflationary food prices, there is a nice correlation between uncertainty and demand for Saco products that we liked,” Pereira says. “We also liked the fact that it is a portfolio, so you’re not relying on any single brand to get it right. Where I get excited is when we think about the value creation plan, we see multiple levers for growth and many of them are smaller opportunities. You don’t need to achieve one single home run to make the deal a success.”

Before taking her position at Fengate, Pereira spent 12 years with Canada Pension Plan investments, where she covered private equity investments in the US and led the consumer investing team. She says that food & beverage offer some of the stability that investors are seeking during periods of economic slowdown. Food & beverage companies tend have steady demand cycles but tend to grow at around the rate of inflation. Pereira found out, however, that Saco has been growing at some of the higher growth rates found in key pockets of the industry.

Read more: Private equity investors pull out funding amidst deal concerns | Wealth Professional

She attributes some of that growth to the pantry staple nature of Saco’s products, meaning consumers buy these products habitually. At the same time, she noted the opportunity for Saco in providing private label products to stores. Because of the concentration in the Canadian grocery market, private labels are very common here. In the US, Pereira says, private labels are far less commonplace. Pereira sees Saco as a potential provider of more private label products as American grocers see the promise of profit there.

While this is Fengate’s first acquisition in the US, they have explored opportunities in the Canadian food & beverage space. They see Saco as an ideal partner capable of distributing Canadian food & beverage brands as they expand in the United States.

The mechanics of the deal itself was relatively straightforward for Pereira. She relied on her past experience with CPP investments to navigate any cross-border issues. She noted that Fengate is a family-held business that has undergone a professionalization process, similar to Saco. The parallels in culture and narrative helped ensure the deal felt like a fit for all parties.

While they can’t fully disclose their leverage metrics, Pereira noted that Fengate does not rely on leverage to generate returns, which is a bit of a divergence from most private equity practices. Because of that, she thinks investors can look more favourably on their deal as carrying less interest rate exposure than some other private equity acquisitions.

Read more: Resilience and opportunities in Canada's shifting real-estate investment landscape | Wealth Professional

Pereira explains that this deal represents something of a change for Fengate’s private equity strategy. Where previously they had focused on Canadian minority deals, they are now looking more at the US market and looking to execute control deals. 

While this is one landmark acquisition for one private equity firm, it can demonstrate some of the trends and themes that advisors may want to be aware of as they look at their own alts exposures. For Pereira, she thinks advisors can view this deal as a microcosm of Fengate’s own private equity strategy.

“You can see intention when you look at this deal,” Pereira says. “This is a team that identifies the sector, builds the right relationships and the right talent in that sector, and then finds the right opportunities…Hopefully [advisors] and prospective partners see the value of our relationships, our network, and the trust that affords us.”