Consumer-sector investing should focus on experience

In the private equity consumer sector, Sun Capital Partners managing director Jonathan Borell sees investment opportunities in the health and wellness space and in personalised experience and services.

Jonathan Borell, a managing director at Sun Capital Partners, tells Private Equity International that while high valuations and volatility may be affecting all sectors, including consumer, there are still opportunities where customers can get value through an unusual product, experience and services.

Last month, Borell was promoted to managing director at Sun Capital Partners, which won two categories in PEI’s Operational Excellence Awards 2015: Americas lower mid-market for its investment in Point Blank and Americas upper mid-market for investing in DBApparel.

Given the high valuations and the volatile public markets, what is the situation of the consumer sector in private equity? 

Valuations across many sectors, including consumer, have been frothy for a while. We’ve seen this especially in restaurants. Retail has been a little more choppy because of concerns around declining traffic and the shift to e-commerce. It’ll be interesting to see if recent volatility in public equity markets and financing markets trickles down into valuations for mid-market mergers and acquisitions of consumer companies, which is where we invest. I suspect they will eventually come down and it may take a bit of time for the trickle down to happen, but I think that creates good opportunities down the line.

How are investors and consumers behaving?

If we talk about retail, there’s definitely some cautiousness from investors on traditional retailers. Retail is a rapidly evolving landscape and has been over the last few years, with e-commerce, mobile devices, etc. So there’s definitely cautiousness, especially with retailers with a large real estate portfolio and with declining traffic in second- and third-tier malls. There’s a wait-and-see approach by some investors on how that’s going to play out.

In the consumer sector, we always see winners and losers. We see rapid shifts in how consumers shop and I’d expect that to continue. One interesting thing with the decline in oil prices and the corresponding decline in gas prices is that we didn’t see a significant increase in consumer spending. Some statistics showed the savings rate in consumer spending has outpaced the savings rate from cheaper gas. [Consumers] are not spending that incremental increase of money.

Where do you see opportunities to invest in the consumer sector?

Some of the larger themes we’re seeing in the consumer sector is the continued trend of health and wellness, especially with millennials focused on what goes into their bodies. We’ve seen growing consumer preferences for unique experiences and services rather than just the product alone, again more with the millennials, seeking personalised fit, personalised service, products picked out just for you, using customer data. Consumers are expecting a higher level of services and experience.

Whether it’s restaurants or retail, consumers are very focused on value; not just heavy discounting but they want to feel like they’re getting significant value for their dollars, so they are willing to spend a lot if they feel like they’re getting value.