Global private equity and venture capital-backed investments in consumer businesses have been on a two-year decline, but activity in the first quarter of 2024 suggests a rebound.

The announced value of private equity investments in consumer staples and consumer discretionary businesses totaled $11.96 billion globally between Jan. 1 and March 12, representing the second consecutive quarter-over-quarter increase, according to S&P Global Market Intelligence data. The amount already exceeds the full first-quarter 2023 investment total of $8.90 billion.

The brightening outlook for deals targeting consumer-oriented businesses is partly tied to moderating trends in consumer behavior four years after the start of the COVID-19 pandemic, which prompted sudden and significant shifts in when, where and how goods and services were bought and sold, said Alberto Dent, US consumer markets deals leader for PwC.

"The environment [for deals] is getting better because it's getting less uncertain," Dent said.

Settling to a new normal

Consumption patterns settling into a new normal could play a role in reversing two consecutive annual declines in PE-backed investment activity in consumer businesses globally.

Private equity investment across both the consumer discretionary and consumer staples sectors peaked in 2021, with announced global deal value soaring to a combined $219.04 billion, increasing more than 136% over the prior-year total, according to Market Intelligence data.

But deal value fell in each of the following years, and the $40.84 billion in PE-backed investment in 2023 was the lowest annual total since at least 2019.

Cooling inflation and the anticipated end of the current rate-hiking cycle are also expected to boost M&A broadly in 2024. A persistent gap between buyer and seller expectations on consumer business valuations is beginning to close, Dent said.

'On the sidelines'

Tim Burke, partner at Stride Consumer Partners LLC, said his private equity firm went 11 months without a deal before investing $2 million in haircare brand Odele LLC in November 2023. It then led a $52 million round for packaged foods business Serenity Kids Inc. in March.

Burke said the founders of lower-middle-market businesses, which Stride typically targets, "were on the sidelines" for much of 2023, convinced their businesses were undervalued in a choppy macroeconomic environment.

Pat Maciariello, partner and COO of Compass Diversified Holdings LLC, whose strategy is to buy, hold and sell middle-market consumer and industrials businesses, said competition for consumer product companies in particular had fallen off, a shift he chalked up to the lower availability and higher cost of leverage.

"Great consumer product businesses would go to market, and you'd have almost a feeding frenzy of private equity firms battling to the finish," Maciariello said. Now, he continued, "It feels like [M&A] processes are thinner and that there are only one or two private equity firms there at the finish line ready to sign a deal."

Goods vs. services

Service-oriented consumer businesses are attracting the most attention from potential acquirers, Maciariello said. Subsectors of the consumer discretionary sector — including education services; specialized consumer services; hotels, resorts and cruise lines; and restaurants — accounted for 587 of the 1,573 PE-backed consumer investments since Jan. 1, 2023, or 37% of deals in that period, according to Market Intelligence data.

"Consumer service businesses are in vogue right now, and there's a lot of people chasing those transactions," Maciariello said, noting that some PE firms think consumer services fare better than consumer products in an economic slowdown.

The pandemic also prompted an "enormous shift in consumer preferences," research group The Conference Board noted in its March consumer trends brief, with consumers yearning for experiences post-pandemic and shifting spending to services from goods.

Five of the 10 largest PE-backed investments in the consumer discretionary and consumer staples sectors since Jan. 1, 2023, targeted service-oriented businesses.

Investment outlook

The upward trend of PE investments across the consumer staples and consumer discretionary sectors in early 2024 comes as consumer spending weakens. In the US, consumer spending growth is forecast to "slow to a standstill" by the third quarter, according to a March report by The Conference Board.

US consumer spending "held up remarkably well in 2023 despite elevated inflation and higher interest rates," the report noted, but growth in spending is projected to slow by the third quarter as gains in disposable income soften, savings shrink and debt grows.

Drew Schardt, vice chairman, head of investment strategy and head of direct equity investments at Hamilton Lane, believes a pullback by consumers will help separate the more resilient consumer businesses from the rest.

Investment scrutiny of targeted companies will increase. "[Private equity is] going to question the consumer-oriented business much more in terms of, 'What do I have to believe to make the returns work?' And so I'd say the bar is definitely higher for those businesses," Schardt said.

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He said experienced investors seek out consumer businesses with multiple paths to value creation and give them the flexibility to execute on growth by structuring deals with less debt.

"You need to set up these businesses with financial wherewithal and resiliency in the capital structure. And particularly, not overleverage them," Schardt said. "We've continued to see equity checks, as a percentage of the total [deal] value, get bigger."