Private equity firms, such as Baird Capital, and large corporations, such as Hormel, are buying their way into emerging mass markets. As economic growth in the U.S. continues to sputter along at a snail's pace, financial sponsors and strategic buyers are seeking ways to drive returns in other countries, especially in Asia, Latin America and Africa. Here's a look at a handful of buyers leveraging growing consumer markets all over the world.
1. Baird Capital
In 2003, Baird Capital opened an office in China to help portfolio companies take advantage of the cost savings of manufacturing in China. But Baird's presence in China soon morphed into an acquisition vehicle, as middle-class wealth in China began to increase and the firm set its sights on taking advantage of China's vast population and growing economy. Since 2008, Baird has been actively looking for investment opportunities in China, investing out of the Baird Capital China Growth Equity Fund.
At the end of 2013, Baird found a strong investment opportunity. Partner Brett Tucker was introduced to Car King and liked what the company offered. Modeled after CarMax Inc. (NYSE: KMX) in the U.S., China's Car King is a used-car business that boasts a strict vehicle inspection process, straightforward pricing and a fixed-sales commission. The goal is to create an efficient and transparent car-buying experience.
"Buying a used car is not a pleasant experience. CarMax in the U.S. has really tried to improve that experience with no-haggle pricing and a clear commission scheme. Everything is transparent," says Tucker. "Car King was founded in 2011 and looks to make the used-car market more transparent in China."
Until Car King, Tucker says used car sales were handled similarly to the way a scalper sells tickets to a baseball game outside a stadium. In China, many used cars are bought and sold by people called huang niu, or scalpers in English. "It's a very fragmented market with a lot of mom-and-pop dealers and scalpers. There's not a lot of trust in the experience, and it doesn't instill confidence in the consumer. Car King is trying to change that and build a brand and experience the Chinese consumer can trust," says Tucker.
Introduced to the deal by Crescent HydePark-which was looking to invest in the company as well, but wanted a co-investor- the company has all the makings of a success story in China. Crescent had turned to Baird because it has experience in the used-car space in the U.S. with its founding of American Auto Auction Group, a platform for buying online used-car marketplaces. (Baird recently sold American Auto Auction to Huron Capital in late May.) Baird also has experience investing China, and has completed more than 10 transactions in the country. Crescent HydePark is a private equity firm that invests in China and the Middle East.
Demographic data suggests why Car King may be poised for success. As the income of Chinese workers rose steadily during the previous decade, they bought new cars. Now, as the middle class continues to grow and attain higher incomes, people are looking to sell their old cars and buy new ones. These trends have created the fastest growing used-car market in the world. In fact, 2.7 million used cars changed hands in 2011 in China, and the annual growth of used car sales has averaged 33 percent in China over the past decade.
To get a sense of the opportunity, consider the ratio of new-to-used cars sold in the U.S. versus China. In the more mature U.S. market, for every new car sold, there are almost three used cars sold. In China, it is the opposite today, where there are about three new cars sold for each used car. This will lead to a wave of used cars headed to the market. China's used-car sales are forecasted to exceed 10 million per year at the end of 2017.
When Baird invested in Car King at the end of 2013, the company had three locations in Shanghai, a cosmopolitan city in which shoppers tend to exhibit less enthusiasm for previously-owned items than consumers elsewhere in China. And yet, Car King was a success there. "Shanghai is a large, more sophisticated city, and people from Shanghai typically like new things. The customers are more discerning there, but people in this city were buying from Car King. We knew this was a strong platform," says Tucker.
Car King is now expanding nationally, as the need for a secondary auto market continues to balloon. In fact, since Baird's investment, Car King has opened four additional locations in China.
"There's a long runway for growth. This is the largest car market in the world, and our goal is to keep rolling out stores nationally all over China," says Tucker.
2. Darby Private Equity
As emerging economies grow and their populations enjoy more wealth, investing in financial services companies becomes a good proposition. This fact is not lost on Darby Private Equity, the private equity arm of Franklin Templeton Investments. In January, the Washington, D.C.-based private equity fund acquired Acrecent Financial Corp. for an undisclosed amount. Darby has made five investments in the financial sector in Latin America: one in a Latin-America-wide financial services company; two regional investments in Central America; and two country-specific investments, one in Mexico and the other in the Dominican Republic.
Acrecent is a commercial finance company focused on providing capital to buy and lease information technology equipment in places where few financing alternatives exist. Acrecent tailors loan and lease facilities and offers significant structuring flexibility. Having started operations in Puerto Rico in 2003, Acrecent expanded to other countries in the Caribbean. Darby's investment will allow Acrecent to expand further into Central America, offering medium-size businesses new specialized financing alternatives.
"The opportunity resides in exporting the management team's best-in-class abilities and expertise in sourcing and structuring commercial finance transactions into a regional scale in Northern Latin America, like Colombia, Central America and Mexico," says Juan Quiroga (pictured), a vice president with Darby. "This market is under-penetrated, given the low ratio of private lending to gross domestic product in all countries, and the small presence of sophisticated players in some of these countries, more specifically in Central America."
Darby has made all its financial investments in Central America through Darby ProBanco Fund II. Established in 2010, the fund earmarked at least 60 percent of its equity and quasi-equity investments for the financial services sector in rapidly growing economies throughout Central America. Middle-market financial services firms in the region will thus receive much-needed capital.
In addition to financial services businesses, Darby is looking at other types of investments. In April, the firm closed on a $385 million deal for a minority stake in Colombian-based Oleoducto Central SA and a percentage of the pipeline's transportation rights from Pacific Rubiales Energy Corp. Ocensa is Colombia's longest oil pipeline and runs from the Los Llanos Basin to the port of Coveñas located in Colombia's northern coast.
Darby also recently invested in Vital Renewable Energy Company, or VREC, a sugar and ethanol producer with operations in Brazil. VREC was established in 2008 and currently owns and operates the Bom Sucesso facility, producing both sugar and ethanol, located in the state of Goiás. VREC is backed by institutional investors in the U.S., Europe and the Middle East, including Paladin Capital Group, Leaf Clean Energy, Petercam and Capital Dynamics.
"Latin America is well positioned to benefit from rebounding growth of the developed economies, above all the United States. The region has a broad pool of well-managed middle-market companies seeking growth capital. The valuations on these companies in countries like Mexico, Colombia and Peru remain attractive, given the low penetration of private equity in the region and the low level of bank financing," says Quiroga.
3. Emerging Capital Partners
Emerging Capital Partners, a London-based private equity firm, has raised more than $2 billion for growth capital investment in Africa. Founded in 2000, ECP was one of the first firms dedicated to Africa, which translated into investments in more than 54 African companies and more than 29 exits through seven funds. In March, ECP took a 33 percent stake in Atlas Bottling Corp., or ABC, which is the exclusive PepsiCo bottler of carbonated soft drinks in Algeria.
Founded in 1995, ABC signed an exclusive bottling agreement with PepsiCo in 1998 and has grown to become one of Algeria's leading beverage players with a portfolio of global brands including Pepsi Cola, Pepsi Max, Mirinda and 7-Up.
About 27 percent of Algeria's population is under the age of 14, providing tremendous potential for growth in the soft-drink sector. Additionally, since the Muslim country does not permit alcohol consumption, soda is particularly in demand. Stronger purchasing power is allowing consumers to purchase soft drinks more frequently and in larger volumes, according to Fast Market Research.
The capital infusion from ECP will be used to increase bottling capacity, build a new production site and give ABC flexibility to develop new product categories. ECP will also provide technical assistance to the management team, professionalizing business functions, such as governance and compliance.
"Algeria is Africa's third-largest soft drink market, and ABC's established track record in the sector sets it apart from its competitors. We seek to back proven global business models, like ABC, that are being pursued across Africa," says William Nkontchou, a director in the Paris office of ECP.
4. The Riverside Co.
At the end of 2013, the Riverside Co. completed an add-on acquisition of Miami-based EcoSmart to its Waterbury, Connecticut-based Eemax portfolio company. Both organizations design and sell electric tankless water heaters, but EcoSmart focuses on homes, while Eemax previously focused on larger office buildings and industrial manufacturing facilities. The acquisition also helped the buyer expand in Latin America.
Tankless water heaters are increasingly popular in Latin America. EcoSmart is popular in Latin America for many reasons. First, as the population grows and wealth increases, more apartments and condos are built, creating the need for more water heaters. Additionally, the hot water heaters do well in warmer climates, because they need less energy to get hot, and they provide hot water at a lower cost than other types of water heaters. The tanks are also small, which is particularly beneficial in an apartment setting.
"Our reach is substantially growing in the Caribbean, Central America and South America. This year, year-to-date, sales are up 146 percent in Latin America. That's very telling," says Joe Manning (pictured), the principal with Riverside's microcap team who led the deal.
Riverside's goal is to expand into other warmer climate countries with growing populations and economies, such as Ecuador, El Salvador and Guatemala. The company is setting up new distributors to sell tankless water heaters into those markets.
"Our products are a great fit for these countries. There's cost savings, energy efficiency benefits, space savings, and these countries don't necessarily have the gas piping infrastructure to handle anything but this type of water heater," says Manning. "There's no need for pipes that are needed for gas water heaters. Places like Puerto Rico are big proponents of our system. We are seeing a big adoption everywhere."
To continue to build out its brand in countries with growing economies, Riverside has hired a sales team to sell the tankless water heaters to mom-and-pop hardware stores, as well as bigger retail chains throughout Latin America. The sales process is unique in each country. And in addition to growing outside the U.S., the company will continue to expand domestically. For example, EcoSmart recently began selling products in Home Depot Inc. (NYSE: HD) stores throughout Florida and Arizona.
Today, EcoSmart and Eemax are operating as two high-growth brands within one combined company. Right now, Riverside is focusing on the growth. "We were able to expand quickly and have achieved 100 percent growth for certain markets in a short period of time. We don't see any reason why this would slow down," says Manning.
5. Hormel Foods
Strategic buyers as well as PE firms are leveraging the demographic trends abroad. The $700 million 2013 acquisition by Hormel Foods Corp. (NYSE: HRL) of the popular Skippy peanut butter brand from Unilever plc (NYSE: UL) brought the buyer into new territory.
The Skippy deal represents a significant geographical expansion for Hormel. Skippy is sold in 30-plus countries on five continents. Annual sales for the Skippy business are expected to be approximately $370 million, with nearly $100 million in international sales. Introduced in 1932, the Skippy holds the No. 2 share in the U.S., behind Jif from J. M. Smucker (NYSE: JMS). But Skippy is the leading brand in China, where peanut butter is in a relatively small number of households, but is growing rapidly. Skippy sales in China account for $30 million to $40 million of the $100 million in international sales.
"Outside the U.S., peanut butter is a growth story," Hormel CEO Jeffrey Ettinger (pictured) said when the deal was announced. "Skippy has a good franchise in Canada. It's growing in Mexico. And we really see opportunity in Asia." The transaction includes Skippy's factories in Little Rock, Arkansas, and in Weifang, China.
Hormel's international group was highlighted at the company's recent annual shareholder meeting. Sales of Spam and other products outside the U.S. grew by 23 percent in fiscal 2013. "The foundation of our Spam family of products and well-developed fresh pork exports, plus the Skippy line of products and our focus on China, has us poised to continue our strong performance in 2014 and beyond," said group vice president James Snee.