This article is sponsored by L Catterton.
When L Catterton decided to launch an impact fund, the firm saw it as a natural extension of the consumer investing strategy it had honed for decades. “We’ve always been top-down, thematic investors,” says Tehmina Haider, who co-leads the impact fund with Michael O’Leary and spent many years in the firm’s growth fund. “There are few consumer themes we’ve had as much conviction in as those related to impact.”
Since 1989, consumer growth equity investor L Catterton, which has more than $30 billion of assets under management, has made around 250 investments in some of the world’s most iconic consumer brands. Increasingly, those have been companies whose sustainability and impact have been significant drivers of value, like clean cosmetics company Tula, organic and natural wellness company Zarbee’s, or sustainable pet food company Lily’s Kitchen.
“Consumers are clearly shifting towards companies that prioritise impact,” says O’Leary, who was formerly on the founding team of Bain Capital’s impact fund. “Creating a dedicated impact fund allows L Catterton to help lead that transformation across the consumer sector, leaning into where the firm has always been strongest.”
In addition to aligning its impact to specific targets within the Sustainable Development Goals, the fund ties a portion of its carry to impact, and reports according to the Sustainable Finance Disclosure Regulation’s Article 9 requirements. “If we believe in our investment thesis – that impact can drive performance in the consumer sector – then we have to create a fund that holds itself to the highest standard,” adds O’Leary.
Here, the two L Catterton partners tell Private Equity International about the shifts they see happening within the consumer sector and discuss the firm’s approach to impact investing.
L Catterton recently launched a consumer-focused impact investing platform; how are consumer attitudes towards impact evolving?
Tehmina Haider: Consumers are increasingly focused on mission orientation and impact as they determine which brands and products to bring into their homes, their kitchens, their closets and their lives. Severe environmental challenges, profound disparities in health outcomes and persistent inequality have all been apparent in the US for decades. But consumers are now connecting those challenges to how they shop and engaging with brands to assess what they are doing to respond.
Data from Stifel suggests more than 80 percent of consumers are seeking brands that focus on sustainability and good community stewardship. Further, Ipsos research found that nearly two-thirds try to buy brands that fit their personal values, up from only half a few years ago. This is true across all consumer segments, but is particularly apparent among younger generations – millennials and Gen Z – which is where purchasing power is poised to grow most significantly over the next decade.
Today, many of the fastest growing consumer companies in the world, and certainly some of the most successful investments that L Catterton has made in recent years, are impact-orientated businesses. Supporting accelerated consumer demand for these brands is also a broad ecosystem including both major retailers and large multinational consumer businesses that are making significant commitments to environmental and social impact. These trends make it an exciting time to be backing the businesses and brands that are having a real impact on the consumer economy.
The impact fund builds on each of L Catterton’s advantages as a consumer investor while putting itself at the frontier of impact management.
Michael O’Leary: Every new fund is a bet on the future, and we are betting on this shift in consumer sentiment and the role that impact is going to play in our lives and economies. We believe the launch of this strategy puts us right where the next generation of consumer companies are going.
You clearly see a correlation between delivering impact and good business performance. To what extent is this accepted today, particularly in the US?
MO: I have always found when debating the role of ESG that the more abstract the conversation, the more disagreement there is. But once you start talking about specific industries and specific companies, then it just becomes like any other business decision. If you want to launch a disruptive beauty brand today, you are going to choose clean ingredients and sustainable packaging because that decision reflects what your consumers care about.
What is exciting in the consumer world is that the connection between a company’s impact and its financial success is so direct.
New York University tracks the performance of sustainable consumer products versus conventional products, and the growth of sustainable products has outpaced conventional products by 2.5 times since 2015. These are deep, secular trends that are influencing the way consumers think about their purchasing decisions, and they are the same underlying trends that are influencing where employees want to work and how investors want to allocate capital. People are voting with their wallets.
Is there a risk that impact may become less of a priority for consumers as a cost-of-living crisis continues to bite?
MO: L Catterton’s strategy has always been to build a model that is uncorrelated with the broader consumer economy. We look to invest in categories backed by long-term, secular tailwinds.
We can track the consumer’s increasing focus on impact over decades, all in line with increasing transparency into the social and environmental crises we face and better options to address them through innovations in technology and business models. That’s not to say it’s all that consumers care about. Affordability matters. Quality matters. Convenience matters. And it differs by category. The same consumer will act differently when they’re buying paper towels than when they’re buying a flight home.
The challenge for impact-driven consumer companies is to find ways for their impact to become a positive driver of the other purchasing criteria that consumers care about as well. For example, the Pew Research Center found that if you ask someone why they buy organic produce, they’re twice as likely to say it’s to get healthier foods than anything to do with pesticides or biodiversity. Meanwhile, a 2021 study published by First Insight found that if you ask Gen Z why they shop sustainably, more will cite quality or value than environmental concern.
TH: Affordability and impact often go hand-in-hand. Reducing packaging waste or sourcing locally can reduce the cost of making a product rather than add cost in.
Another important factor to consider is consumer loyalty. During economic downturns, consumers do of course trade down where they can to save cost, but they also tend to entrench with brands that they trust. Consumers are demonstrably more loyal to brands that reflect their values, which should benefit mission-orientated businesses through a period of economic challenge.
You specialise in the consumer segment within the impact space. What edge will you have as an impact fund when competing against other private equity investors with a consumer focus?
TH: We believe that our impact focus offers advantages throughout the investment process – from sourcing, diligence, and winning deals through adding value as mission-aligned partners to entrepreneurs and management teams.
We benefit from the large ecosystem created to support entrepreneurs building mission-orientated businesses. Viewing the consumer landscape through an impact lens means we are consistently monitoring consumer sentiment towards sustainability, health, equity, access and inclusion. This allows us to identify and invest behind key consumer themes early and then help companies accelerate into those opportunities.
Most importantly, we believe strongly that individuals building mission-orientated companies are seeking partners who share their conviction that the leading consumer brands will be built around impact. Being a consumer-focused impact investor uniquely positions us as a partner-of-choice to these businesses.
How big a role can impact ultimately play in the private equity universe?
MO: Impact is growing rapidly but still represents a tiny fraction of global capital markets. What impact is doing very effectively, however, is proving that there are better ways of building companies. We are showing that focusing on a company’s social and environmental impact is not just better for the world but can be a better investment strategy.
Impact investing just crossed $1 trillion of assets under management, per the Global Impact Investing Network, but our real impact will come as we’re able to shift how the other $250 trillion of global capital is invested.
What are you looking for in an impact-driven consumer business?
MO: We are looking for consumer companies that make the economy significantly cleaner, healthier or more equitable. Cleaner means mitigating climate change, preserving nature and reducing waste, particularly plastic waste. Healthier means reducing disparities in health, wellness and nutrition. More equitable means expanding financial inclusion, improving education and workforce investment, and catering to chronically underserved consumer groups. This reflects the sets of issues consumers care about and opportunities we see in growth-stage companies.
Beyond that, we’re looking for companies that are really defined by their impact: companies where impact is why entrepreneurs founded them, why employees work for them, and why consumers choose them. These are companies where impact is what drives the success of the brand, and it includes the companies that are enabling other consumer brands to transform.