Dan Gomez Champions Trust-Based Food Sector Investing

Dealmaking across the food chain is expected to comprise the second-largest share of private equity transactions this year after tech company activity, and Dan Gomez is in the perfect place to capitalize on that.

Gomez is managing director and head of food and beverage for investment bankers Brown Gibbons Lang & Company (BGL), and is ensconced in Chicago, the epicenter of a region filled with midsized, privately held companies—many of whose owners are looking for an exit strategy.

“There are a lot of founder-owners out there looking for strategic alternatives,” says Gomez, a former naval aviator who turned investment banker more than 15 years ago. “They have built their companies from the ground up and need a way to monetize. And I’ve been fortunate enough to be successful helping them do that.”

Private equity (PE) mergers and acquisitions experienced an uneven 2023, challenged by high inflation and interest rates, an economic slowdown, and geopolitical unrest. Yet many private equity players are optimistic about this year, and consultancy EY predicts that deals in the consumer-facing sector will rise to about 14% of the total in 2024 from 12% last year, supplanting industrials as the second-largest category.

While BGL is headquartered in Cleveland, Gomez is based in America’s food industry capital, shedding shoe leather by attending one industry show after another at Chicago’s McCormick Place Convention Center while also poring over trade publications to understand the business and scout for prospects. “It’s a highly banked sector, a huge staple, and a continued growing sector in the economy, with a lot of deal activity, historically and currently,” he says.

Sure, it’s not as spicy a scene as slinging venture capital at digital food-tech startups in Silicon Valley, but it suits Gomez to a T. “I go to founder-owners and earnestly tell them what alternatives are out there, and I’m able to resonate with them,” he says. “Integrity is very important to our firm and to investment banking and to my military background. I take it seriously. And there’s a trust element to talking with founder-owners.”

The notable ingredients deals Gomez has facilitated include the sale of Crest Food Ingredients to Harwood Private Equity in the first quarter of 2024, and the sale of fast-growing Starwest Botanicals to Incline Equity Partners in 2021.

Gomez shared his perspectives on food industry investing and more with Food Technology Contributing Editor Dale Buss.

You and BGL have a mid-market lens on the food business that focuses on private equity. How is that different from how venture capitalists (VCs) look at it?

From a startup brand standpoint, if there’s a fundamental gap in the marketplace that a food can fill, or a brand will satisfy certain consumer preferences, that’s on the VC side. And they are taking more of a risk and have more of a portfolio theory than private equity. They’re writing significant checks, but typically they are for more of a minority investment rather than the type of banking we do, which is a majority or 100% sale.

PE looks more toward triangulation in the value of brands. Yes, growth rate matters, and so does the ability to meet consumers’ demands, but profitability plays a lot into it as well. A brand may have proof of concept and the ability to accelerate sales, but you need to have profitability for PE firms to invest.

And typically, PE investors are majority investors, and they are much more focused on profitability or a path to profitability. PE firms can typically add value on the operational side or through growth, and often have relationships with [retailers] so they can help on the revenue side.

Still, just like VCs, you’ve got investment themes you follow. What are some of them nowadays?

There’s a lot of interest in the fermentation space now, and a few PE deals have occurred recently, including the sale of Patriot Pickle by Swander Pace Capital [to H.I.G. Capital]. There’s a lot of interest in ethnic-inspired cuisine and Asian influences. U.S. companies even in the heartland have secret recipes and sauces that aren’t authentic to Asian foods, but they’re able to adapt their recipes or amend them to fit the American or Westernized consumer. They’re able to take the concept and adapt it to a flavor profile that resonates in the United States.

And as far as plant-based is concerned, those foods need to be something that fit specific consumers’ needs or appetites. The realization that the market has accepted now is that it’s not for every consumer, that [plant-based products] are not always going to be able to displace the traditional protein habits that consumers have.

Some would argue that the reason for this is education and knowledge and increasing technology. But sometimes the ingredients aren’t as beneficial as more natural proteins that come with traditional consumption. As the technology has evolved, and as companies have learned through trial and error, plant-based is becoming more and more of a staple and a mainstay for consumers interested in those products for dietary or environmental reasons.

Three or four years ago, plant-based chicken nuggets were permeating trade show floors without much differentiation. But now that has settled down, and you have winners and losers.

Where does that leave animal proteins and the companies that provide those products?

While plant-based dairy continues to progress, animal protein products are here to stay. Several PE firms have launched into meat snacks and protein distribution in foodservice or retail. They are better-for-you alternatives that are high in protein. People realize the more protein they have, the better. And, versus lab-generated protein, people like to stick with the basics. This is something that will continue to flourish in the near and intermediate term.

Where does climate change come into your consideration as an investment theme?

As we’re conducting due diligence, ESG (environmental, social, and governance) in general is an important factor. In terms of sustainability and the environmental piece, we want to make sure companies that PE firms are buying are adhering to the best standards.

What’s happening is that companies also are implementing food safety and better quality assurance as standard operating procedure, which requires the traceability of a product from farm or pasture to the table. They need to make sure those boxes are checked, and PE firms are going to make sure, or valuation may suffer as a result.

A lot of the middle-market food companies are providing private label products. How do PE firms feel about them?

PE firms are thirsting for them. Private label is a staple and mainstay of the business, and there is no brand risk. PE firms are able to get into the food and beverage ecosystem through them without having to capitalize on a specific brand. If a manufacturer offers their own brand, that’s fine, but it’s in something that’s familiar to them.

So private label has been attractive from the PE standpoint for the last two or three years. At the Private Label Manufacturers Association trade show in Chicago every November, the number of PE firms that you see now, versus five years ago, is night and day. So many more of them are interested in the category.

It’s pretty well established that food companies have been behind many other sectors in the implementation of new technologies. Is that important?

A lot of food companies were slower to adapt in e-commerce and in infusing a certain amount of technology in the manufacturing process. But while technology matters, it doesn’t matter to food and beverage companies as much as if they’re able to operate efficiently.

High labor rates and costs have prompted them to realize that technology needs to come into play in terms of increased automation, without decreasing customization or specialization or the flavor of the product. Mid-market companies are going to have to come to terms with this or get priced out by the high cost of labor.

How do you view the macroeconomic environment?

It’s been tough—not just the economy, but also geopolitical factors. For instance, grains and oils and other things that are sourced from Eastern Europe [and so disrupted by the Ukraine war] have played into supply chain disruptions and the hesitancy of some [PE] buyers to lean forward in their evaluation multiples. That has been mitigated to some extent, but the concern is always there. Buyers want to make sure their targets have dual-sourcing capability.

And on the economic front, high leverage rates matter on the PE side. But the willingness of lenders to provide more attractive financing is coming back. They’re the last to adapt and more risk-averse than other financial institutions. They want the market to be settled first.ft