Five Questions on Food and Beverage: Chip Johnson, Falfurrias Capital Partners

July 21, 2020

The interview below is part of a new series from McGuireWoods that features interviews with professionals in the food and beverage industry. To recommend a professional or company for a future interview, please email Brad Austin or Jim Neale.

Charles JohnsonCharles “Chip” Johnson rejoined Falfurrias Capital Partners in 2016. Previously, Johnson was chief financial officer of North American T&D Group, a Falfurrias Capital Partners-backed holding company for investments in the power transmission and distribution industry. Prior to North American T&D Group, Johnson served as a senior associate with Falfurrias Capital Partners where he focused on acquisition targeting, due diligence, structuring and execution. Before Falfurrias Capital Partners, Johnson was a financial analyst for McColl Partners, a Charlotte, North Carolina-based middle-market investment bank. Johnson also was the founding curator of the World Economic Forum’s Global Shaper Initiative in Charlotte.

Q: Tell us a little about Falfurrias and its industry-first approach. Why food and beverage?
Chip Johnson: Falfurrias Capital Partners is a growth-focused private equity fund based in Charlotte, North Carolina. We are currently investing our fourth fund, which is a $500 million fund we closed last year. Industry-first is a research-based approach to developing an investment thesis in markets we believe will demonstrate attractive growth during the foreseeable future. These theses are rooted in durable trends that we have identified, and we typically begin with a fairly broad survey of the markets and then allow our research to guide us toward focusing on more specific segments and subsegments. In most cases, we’re partnering with a retained executive who has experience in the market who helps us develop our thesis and identify investment opportunities.

When everything goes right, we’re able to sit down with the companies we have identified through our research and talk about: (i) what we like about their markets, (ii) what we like about their businesses in particular, and (iii) most importantly, how we can be a value-added partner to them. We began looking at the food market because we like the stability food provides during recessionary environments and because we were seeing large CPGs shift focus away from R&D and brand building toward cost-control initiatives. We also observed a proliferation in specialty diets as well as consumer perceptions that larger brands are less authentic and believed these factors created an environment in which smaller, more nimble brands could thrive.

Q: Are you bullish or bearish on the food and beverage industry? Does that view exist across all industry sectors?
CJ: We remain very bullish on the packaged foods market. The dynamics we first identified are still at play, and during COVID-19, players who sell through retail have mostly seen demand for their products increase as consumers have shifted toward eating more food at home. I cannot say that we are as enthusiastic about all of the other markets that we actively cover.

Q: Will market pressures reduce multiples previously seen, or do you expect alternative lenders to step in and provide credit that supports the valuations?
CJ: I don’t think anyone knows how to answer this question yet. Certainly the weakness in the lending markets is causing some sellers to hold off on bringing businesses to market, and we know that the few transactions that have closed have had lower leverage and higher pricing than they would have pre-COVID-19. We have heard that capital markets have opened up even more over the last two to three weeks, so the impact of availability of debt may be muted if things continue in the direction they’re heading. It’s also important to note that there is a lot of capital on the sidelines that buyers are anxious to get to work, and I believe there will be a bit of “scarcity value” associated with high-quality deals that actually make it to market in the coming months.

Q: Can you give us an update on the recent acquisition of C.F. Sauer?
CJ: I couldn’t have imagined that we would get off to a better start at Sauer Brands. We’ve assembled a talented team that has developed a very thoughtful strategy for the future of the business, and they’ve wasted no time implementing it. The Duke’s Mayonnaise brand, which is the crown jewel of the portfolio of brands, has continued to generate attractive growth both in our core market of the Southeast as well as in the substantial “white space” represented by the rest of the country. Duke’s has an incredibly loyal customer base and a story that resonates with consumers. We’ve also made some strategic decisions in our spice businesses that will allow us to capitalize on growth in those brands at a time when food at home is thriving. Finally, we were able to close on the Chicago Custom Foods add-on acquisition, which adds Kernel Season’s, the leading popcorn seasoning brand, to the portfolio. CCF’s leadership team has also developed a few emerging brands — Tasty Shakes, Veggie Season’s and Truffle Season’s — that we believe have a great deal of upside. We’re pleased with the way things have gone so far at Sauer, but we’re also excited about the future.

Q: You are a big reader. What are some recent books you have enjoyed?
CJ: Reading has kept me sane during quarantine. I’m currently reading a book called The First Tycoon, a biography of Cornelius Vanderbilt that was recommended to me by one of our portfolio company executives. I’m enjoying it because it delves fairly deeply into the political and economic debates from the mid-19th century that in many ways laid the groundwork for the economy we have today. I’m also reading a collection of short stories by Haruki Murakami called The Elephant Vanishes that I would put squarely into the “just for fun” category.

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