Private Equity Pours in with More Than Capital

July 1, 2015 By Christopher Shepard

 This column first appeared in the July 2015 issue of All About Beer Magazine. Click here to subscribe.

Between last September (2014) and this past April, half a dozen breweries, producing between 60,000 and 200,000 barrels in 2014, announced that they’d received investments from private equity firms. The pace of these deals hasn’t slowed. As this went to press, Bronx Brewery, a smaller operation that finished building a facility in New York last summer, announced a similar “strategic partnership,” a seventh deal. More have probably been announced since.

But it’s not always clear when private equity firms invest in small brewers, usually in exchange for an ownership stake. Most of the time, they don’t receive the attention or elicit the response that acquisitions made by much bigger breweries or firms do. And details of these deals’ terms often remain unclear. After all, they’re private transactions between privately held companies, as you’ll hear a lot if you’re in the business of asking.

We do know that private equity firms already operate in many industries. They manage the investments of individuals or small groups, like families. For example, Ulysses Management, a New York City-based “family office,” took a majority stake in Southern Tier Brewing Co. last September. Ulysses primarily manages the investments of the Nash family and has about $1.5 billion of equity capital under management. But the private companies don’t always share where the money comes from or everywhere it goes.

A number of private equity firms seeking to invest in small breweries have experience with other consumer goods, like Encore Consumer Capital, which closed a deal to buy Oregon’s Full Sail Brewing Co. with a group of local investors earlier this year. It’s invested in Ciao Bella Gelato, Aidells sausages and other relatively small food and drink brands. Encore has about $400 million in equity capital at its disposal. Others investing in small brewers have up to a few billion.

But private equity investments don’t just offer capital to pay for past or future expansions or to provide liquidity to early investors, or to basically buy out friends or family that put up money early on. Many call them “partnerships” because they offer access to the business savvy and expertise of the day-to-day operators of the firm and its experienced board members. They also offer the opportunity for existing brewery management teams and employees to remain in place. Full Sail co-founder and president Irene Firmat pointed to this both before her fellow employee-owners voted to sell their stakes, ending the company’s Employee Stock Ownership Program (ESOP) and when announcing its deal with Encore.

The deal also helps “keep our company independent,” Firmat wrote to employees at the time. Abita founder and president David Blossman made similar comments as he announced its partnership with a new company, Enjoy Beer LLC. Founded by Harpoon co-founder and longtime CEO Rich Doyle, Enjoy Beer brings together a team of experienced beer executives to offer partner-brewers, like Abita, “the resources and expertise [they] need for successful long-term growth,” Blossman says. Enjoy Beer’s funding comes in part from Friedman, Fleischer & Lowe, a San Francisco-based private equity firm with about $4.5 billion under management. Enjoy Beer plans to pick up stakes in up to five more breweries over the next few years and may eventually take the company public.

Pooling resources and knowledge by bringing multiple smaller brands under common ownership looks increasingly attractive in the hyper-competitive craft marketplace.

“Collaboration” was a big part of the explanation provided by Oskar Blues founder Dale Katechis when announcing his brewery’s acquisition of Perrin Brewing of Michigan. Oskar Blues funded that deal in part by selling a stake to Fireman Capital Partners, a Boston-based private equity firm that took a majority stake in Utah-based Squatters and Wasatch brands back in 2012.

The other two recent deals became public last September, around the same time as Southern Tier’s announcement. Utah’s Uinta Brewing Co. announced it sold a stake to the Riverside Co. Later in the month, it came out that Georgia’s SweetWater Brewery had sold a stake last year to TSG Consumer Partners, which was part of the investor group that recently bought Pabst.

Rumors abound and no one knows the future for sure, but there’s a lot more chatter recently about (partially) private equity-funded portfolio plays (or “rollups”) later taken public.

That last bit, going public, or one possible “exit” for a private equity firm, is key. The companies managing these investments expect to see a return, to grow a company and sell their stake for more than they paid. Less patient firms may sell off investments after three to five years. But others hold on much longer.

A lot remains unclear about this flurry of deals, its impact and how long it will continue. How will the source of capital and business expertise affect the way these brewers compete against not only larger but smaller competitors? How will consumer perception change, if at all?

What is clear is that a growing number of brewers run businesses worth the significant investment that these deals represent. A growing group of investors see these brewers as sound, profitable businesses. You could also view these deals as a vote of confidence, a sincere belief (to the tune of tens of millions of dollars) that these small breweries have plenty of growth ahead of them. And lots more votes wait to be cast.