Courting the Next Lululemon - Bloomberg Gadfly

January 15, 2016 in

The next Lululemon, Shake Shack or SoulCycle may have just had its first taste of the spotlight at this year’s ICR Conference. And this time, there may have been more sets of eyes watching the show.

The event, which was held this week in Florida, puts fast-growing companies in front of prospective investors and can signal an initial public offering is in the near future: Of last year’s private-company attendees, budget gym operator Planet Fitness, retailer Ollie’s Bargain Outlet and restaurant chain Wingstop are now public.

For those too small or not-yet-ready for an IPO, it’s a chance to raise their profile with dealmakers and drum up heightened interest from private-equity firms and other investors. This year’s lineup included the likes of restaurant and entertainment operator Punch Bowl Social, boutique fitness group JoyRide Cycling Studio, nut-free snack maker Skeeter Snacks and specialty beverage Blossom Water.

Private-equity firms, which aim to drive growth through operational improvements such as expanding distribution channels, enhancing product lines or opening new locations, will no doubt be kicking the tires on these businesses. If an investment is successful, big profits beckon when the company goes public or is sold to a larger private-equity firm or corporate buyer.

But those corporate buyers are wising up. In recent months, some have stepped in earlier than usual by acquiring stakes in small private companies, making potential takeovers cheaper than they would otherwise be.

Though those deals stand to dent private-equity returns, they also give firms a clear path to sell within a predetermined time frame (usually around five years) which can be helpful if volatile or slumping equity markets make an IPO (and follow-on block trades) challenging.

In November, Hain Celestial Group took a stake in Chopt Creative Salad Company alongside private-equity firm Catterton and three other investors. A month earlier, Whole Foods Market invested in Mendocino Farms, an upscale sandwich chain (with only 11 stores) that already had private-equity backing. Also in October, Jollibee Foods of the Philippines spent $100 million on a 40 percent stake in fast-casual restaurant chain Smashburger, which also had private-equity roots.

If more so-called strategics like cash-rich Monster Beverage or the recently-acquisitive Post Holdings pounce on stakes in such companies earlier, private-equity firms — while unlikely to be left out of deals completely — could be left thirsting for more.

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