Online grocery-delivery company FreshDirect's revenue soared about 50% on an annualized basis as New York City residents quit in-person shopping over fears about COVID-19 contagion.
Surging demand for home-delivered food staples during the pandemic meant FreshDirect was ideally placed to serve New York City under stay-at-home orders. This revenue lift ultimately helped seal a sale of the company. Last week, Dutch grocery store group Koninklijke Ahold Delhaize NV and private equity firm Centerbridge Partners closed on the acquisition of FreshDirect.
The company's primary lender, private credit provider Brightwood Capital, received full repayment on its debt, plus interest, plus a return on its equity stake. It is worth pointing out that the road to the sale of FreshDirect, as with many companies that mature from their startup roots, was not always straightforward.
FreshDirect may also offer a timely lesson to private credit lenders as borrower companies, straining from prolonged closures due to the pandemic, turn to lenders for more capital.
FreshDirect was primarily family-owned when Brightwood first became involved with the grocery-delivery company. Brightwood Capital initially provided a $50 million cash flow-based term loan with FreshDirect in 2014.
At the time of Brightwood's initial investment, FreshDirect sought to expand beyond New York, New Jersey and Connecticut into an area stretching from Massachusetts to Washington, D.C.
By 2016, Brightwood upsized FreshDirect's term loan by about double, to approximately $100 million, in addition to about $130 million in equity. That year, FreshDirect also closed a $189 million investment round led by J.P. Morgan Asset Management on behalf of its PEG Digital Growth Fund II LP, returning investor W Capital and other investors, including the AARP Innovation Fund.
By then, FreshDirect's annual revenue exceeded $600 million, primarily due to leading online market shares in the New York and Philadelphia metro areas. The company turned its focus to consolidating operations in the South Bronx, a move that turned out to be slower and costlier than expected. Customer complaints about missing items and botched orders soared. Adding to challenges was Amazon's announcement in 2017 that it was buying Whole Foods, threatening FreshDirect's dominant market share. By the end of 2019, the company's market share in the New York City metro area had eroded to 46%, from 66% in 2017, according to data from research firm Second Measure published in a New York Times report in February 2020.
Brightwood stepped in with an additional $45 million of super-senior payment-in-kind notes and warrants in 2019 and early 2020. This gave the company the ability to reinvest fresh cash flow into the growing business, according to the lender. Equity investors contributed an additional $22.5 million.
Extending the interest-only PIK notes, on top of the $100 million existing loan, at a challenging moment for the company was not a decision Brightwood took lightly.
"You have to revisit your initial underwriting and analysis. You choose your spots when you do that. You have to have high conviction in the business. We felt our core value drivers were still present," said Sengal Selassie, CEO and co-founder of Brightwood.
Behind Brightwood's eventual investment decision over the PIK notes was FreshDirect's established logistics and distribution business in the Tri-state area and still-dominant market share in key metro markets. The company also owned a lot of very valuable real estate by this time.
"You'd love every investment to be a no brainer all the way through. But how you handle companies that run into challenges will ultimately be what differentiates private credit firms. Everyone in the private credit business faces a tight window of potential returns," said Selassie.
Article amended at 1:25 p.m. ET on Jan. 14, 2020, to add detail about market share data in eighth paragraph.