CHICAGO — Amid the dense forest of private equity firms that have emerged over the past several decades, one tree has come to stand out within the thicket from the food industry’s vantage point. Since the start of the century, Chicago-based Arbor Investments has expanded steadily, acquiring and growing over 80 food or food-related businesses.

How in the age of artificial intelligence, virtual/augmented reality and other transformational technologies does a firm specializing in transforming food manufacturing and distribution businesses remain relevant? Why does Arbor Investments focus exclusively on food? Is the firm’s success sustainable as it scales up?

These are a few of the questions explored in a recent interview of Gregory J. Purcell, co-founder and chief executive officer, together with two other leaders at Arbor Investments — Carl S. Allegretti, president, and Alison B. Miller, partner and chief marketing officer. Private equity firms are notoriously tight lipped about their workings, and the responses of the Arbor Investment leaders offer deep insights into the rarefied world of this increasingly important source of capital and engine of change for the food industry.

From modest beginnings, the firm has grown impressively. Twenty years ago, Arbor’s portfolio of companies had combined revenues of $65 million; today the annual revenue of Arbor’s portfolio of companies is $2.6 billion. Viewed on a combined basis, Arbor’s current stable of 12 portfolio companies would be the size of a large consumer packaged foods company, Allegretti said.

“We have close to $400 million in EBITDA, and $2.6 billion in annual sales,” he said. “For comparison, our EBIDTA would put us ahead of TreeHouse Foods.”

In the last 24 years, the firm has made a cumulative total of $2.3 billion of equity investments.

“We operate as more or less a food conglomerate backed by private equity,” Allegretti said.

The firm said this conglomerate of current portfolio companies operates 25 manufacturing plants and 17 distribution centers and has almost 7,000 employees.

Differentiated among the small number of private equity firms with large food portfolios, Arbor Investments’ holdings are not centered on well-known consumer brands and span numerous segments of the food, beverage and ancillary industries. The portfolio includes: Carnivore Meat Co., pet food; Concord Foods, food and ingredients; Crown Bakeries, baking; Golden Malted, waffles; Rubix Foods, flavors and ingredients; Steelite International, tableware; and Bradshaw Home cookware, bakeware and cleaning products

Previous Arbor portfolio companies have been acquired by leading consumer packaged goods companies and distributors, including Nestle SA, Hormel Foods Corp., Colgate-Palmolive Co., KeHE, Sysco, and UNFI.

Purcell, who co-founded Arbor Investments in 1999, began his career not in private equity but in commercial banking in Chicago in 1988. It was there he came to a realization about the food industry that eventually resulted in the launch of Arbor Investments. Many of his banking clients were regional food processing companies, and his due diligence on numerous leveraged buyouts and management buyouts gave him an appreciation for the attractive financial characteristics of many of these businesses.

“The penny finally dropped about how leverageable and stable the cash flows are of these companies and how these companies seemed to defy efficient markets,” he said.

Many of the companies he worked with produced generous profit margins that theoretically should have attracted competition, were markets truly efficient, he said.

“These were companies that generally were under $100 million in revenue and were great at what they did,” he said. “They demonstrated excellence. I realized that a lot of these companies are flying under the radar.”

Purcell turned this theory into action by leaving commercial banking and going to work for Reyes Holdings, a beer distribution business looking to diversify by investing in food companies.

“They were awesome,” he said. “Chris Reyes gave me a canvas to paint on. I went and bought companies for them.”

After four years, Purcell left Reyes Holdings to begin purchasing companies on his own. A seemingly pedestrian initial investment strengthened Mr. Purcell’s conviction regarding the potential of food businesses. A pickle company based in Springfield, Mo., that supplied several major quick-service restaurant chains was acquired. The business included 1,000 tanks spread across a 29-acre property.

He recalled, “That was the genesis of, ‘Great, you’re investing capital. You’re supplying to global QSR brands. You see first-hand how life as a supplier to a global brand can be fantastic.”

The pickle business also showed Purcell that success is possible for a well- operated, well-positioned food company even if the business focuses on private label rather than brands. Tapping into his own penchant for entrepreneurship, he made the decision to co-found Arbor Investments in the late ‘90s.

The timing, at the peak of the dot-com boom, was unhelpful.

“When you looked at it on the sexy meter, we registered negative,” he said. “We were up against venture taking public. We were, ‘No, that’s not our strategy. We want to be the market maker for buying food manufacturing companies in the US and Canada.’

“Things worked out. Today we are the market maker. If you’re a private food company with less than a billion in revenue, there’s probably an 80% brand awareness of Arbor Investments. They know us.”

Allegretti, who joined Arbor in 2020 from Deloitte, where he was chairman and CEO of Deloitte Tax, recalled encountering Purcell 30 years earlier while at Reyes and then when Mr. Purcell left to start out on his own.

“He placed a bet on himself, and he won,” Allegretti said. “That is the entrepreneurial spirit that launched Arbor.”

This scrappy background helps Arbor secure deals to this day, Miller said.

“It resonates with founders and entrepreneurs when we first meet,” she said. “Greg can speak their language because he’s also an entrepreneur. Greg’s like, ‘I get it. I know what it’s like to barely make payroll.’”

Allegretti added, “Entrepreneurs are not trusting people. And when an entrepreneur can connect with an entrepreneur, that gives us a competitive advantage.”

Additionally, the company’s focused background gives Arbor Investments a leg up during its due diligence as well.

“We’re kind of hard to fool,” Purcell said. “Whether the CEO is 78 years old or 28 years old and asks whether we know their customers — we know all of them. We do business with everyone across the board from Costco to Walmart to McDonald’s.”

Purcell said the firm has a decades long commitment to investing in talent, innovation and CapEx.

“We’re running the same playbook every time, whether it’s plates or croissants or pet food,” he said. “We like to think we’re getting better as we get older. It’s more knowledge, it’s more mistake elimination.”

While Arbor Investments’ entrepreneurial spirit has helped the firm secure investments in companies it admires, success has required a different mindset than is the norm in private equity. This mindset results in substantive steps Arbor takes to maximize the likelihood the companies it acquires will prosper.

To start with, the Arbor approach to investing is a far cry from the highly leveraged model made famous in the 1980s and often necessitating the acquirers to rapidly slash costs or sell off segments of the acquired business to engineer a profitable outcome. While Arbor uses considerable leverage, Purcell said the firm typically injects 50% equity in its investments, materially changing the trajectory of how its deals play out from acquisition to exit.

“If we buy a company for $100 million, we’ll write a check for $50 million in equity and then $50 million in debt,” he said. “The rest of the industry would write a check for $20 million in equity and use $80 million in debt. We have less constant pressure on us from the banks to service the debt. As a result, No. 1, we’re de-risking the investment, and No. 2, we’re using that extra cash flow to reinvest in the business.”

Arbor prides itself on patience, giving its portfolio companies what time is necessary to grow substantively and sustainably. Still, the clock is ticking once Arbor invests, and Miller described a comprehensive and intense approach taken to make successful companies better once Arbor takes an ownership stake.

“It’s called our functional discipline team within Arbor,” she said. “There are all the functions you can think of within an organization we have in house. We have in-house legal. We have a general counsel and assistant general counsel. They work hands on with all our companies on contracts, labor negotiations, etc. We have in-house IT, whether it’s setting up a new ERP system or a new accounting system. We have in-house accounting and finance working with our portfolio company CFOs hand in hand. We have in-house R&D, operations, branding and marketing; we have HR, a chief people officer.”

Given that most private equity firms often have no specialized expertise in the industries they invest in, consultants often are used both for due diligence and to develop new strategic plans for portfolio companies.

“Whether it’s McKinsey or BCG (Boston Consulting Group), they often outsource everything,” Purcell said. “And we have the opposite model, which is in-source everything. We have in-house resident experts helping the company execute in real time.”

Further illustrating the point, Purcell highlighted the deep consumer packaged foods experience of several current members of the Arbor Investments team:

Timothy G. Fallon, a senior operating partner, was CEO of Columbus Foods, an Arbor Investments portfolio company eventually sold to Hormel Foods. Before that he held senior management positions, including c-suite assignments at leading consumer packaged foods companies including Kettle Brand potato chips and Annie’s Homegrown.

Chuck Davis, operating partner, spent 35 years at Kraft Foods/Mondelez, most recently as executive vice president, innovation and quality.

James R. Durkin, senior vice president of operations and supply chain, led operations at Blommer Chocolate Co. and spent 32 years at Kraft Foods in supply chain and manufacturing leadership assignments.

Miller, whose background includes senior marketing roles both with General Mills, Inc. and the Chicago Cubs, helps elevate the branding and marketing function within portfolio companies. Arbor taps the expertise of its team not only after companies are acquired, but also during due diligence as the firm assesses the potential of investment candidates.

Asked for an example of the kind of marketing changes Arbor might effect, she cited work underway with a current portfolio company — Carnivore Meat Co., based in Green Bay, Wis., and maker of freeze-dried raw pet food sold under the Vital Essentials brand.

Ahead of the acquisition of the high-end pet food business, Miller cautioned the team that the Vital Essentials brand needed considerable work.

“I told them, ‘If we do this deal, I think it’s going to need a brand overhaul,’” she said.

Asked to elaborate, Miller said consumers couldn’t discern the premium nature of Carnivore’s products from the appearance of the Vital Essentials packaging.

“It was dated packaging, not standing out on the shelves,” she said. “It didn’t have a point of difference communicated to the consumer. The products do, they just weren’t communicating it. It’s super-premium, high-end, raw pet food. You wouldn’t have known it from its packaging. They weren’t talking about it.

“I sat in that first meeting and thought, ‘This is interesting. I see the right product and the right opportunity. It needs new branding and packaging to bring it to market.’”

Similarly, operations professionals on the Arbor Investments team have raised key red flags for otherwise promising investment opportunities, Miller, who has been with the firm for five-and-a-half years, said.

“We all have a voice, and early on we’ve had many situations where it was, the plants are in rough shape or they don’t have the right food safety protocols, or we can’t source labor, all things that require attention and investment as we draft our investment thesis,” she said.

Changes in staffing often are required as well. Such moves are challenging to make at any company but especially at family-owned businesses. Purcell said owners frequently look to Arbor to make the tough choices around leadership needed to move companies forward.

“A lot of times they’ll say, ‘Carl, better if you make the change than me,’ because Thanksgiving could get rough,” Purcell said.

From HR to other basic functions, the approach Arbor Investments takes when it invests in portfolio companies is straightforward, Purcell said.

“Carl, at every meeting for every company, starts off with the first page of the deck that says, ‘What’s working, and what’s not?’” Purcell said. “We don’t need 400 pages of McKinsey to tell us what’s working. We’re setting 7,000 people, everyone in our food conglomerate, on the same page immediately. For the management team, it’s clear messaging to every one of our teammates and at each company.”

Allegretti added, “Talent, innovation and CapEx are part of the secret sauce at Arbor Investments. The other thing we bring that entrepreneurs may not have really focused on is their strategy. Where are we going to go? We’ve always won a battle if we get everybody in the room, management and our team, to agree where we’re going. Then we debate how we’re going to get there with the talent, innovative ideas. It’s all tied to a broader strategy that we’re bringing to our investment portfolio.”

At Arbor Investments the average hold period for portfolio companies is close to seven years. The longer time horizon often is needed when transformational changes at the businesses are pursued, Allegretti said.

“We always start with the value creation plan, then set out to execute our plays,” he said. “Our Arborists play a long game. As the growth plan plays out, there ultimately comes a time when we look for the next buyer — taking into account what is in the best interest of the business and, ultimately, our investors.”

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