Deal in Focus: TSG invests in BrewDog

US-based private equity investor TSG Consumer Partners this month invested £213m in Scottish craft beer producer BrewDog in a deal valuing the business at £1bn.

The transaction will see TSG acquire a 22% stake in the business. It will be structured as £113m in replacement capital – with the company's co-founders and early-stage investors making a partial exit – and £100m in expansion capital.

Early-stage backers that took part in the Aberdeenshire-based brewer's crowdfunding rounds will be eligible to sell up to 15% of their shares and up to a maximum of 40 shares. By the end of 2015, the company had raised a total of £14m via crowdfunding, according to publicly available documents. The GP will be awarded preferential shares as part of the latest deal, giving it the right to an 18% annual return on exit, the Guardian reports.

There are only a certain number of investors focused on this space that have experience in the craft beer sector and have the amount of capital that was required in this case" – Kiran Sharma, Ropes & Gray

TSG has invested on the basis of a 10-year holding period, according to a statement issued by the brewer. This is in part a response to growing demand from LPs for different investment approaches. Kiran Sharma, a partner in the private equity team at legal firm Ropes & Gray, which advised the GP on the deal, explains some LPs are beginning to question the logic behind limiting holding periods to five to seven years – particularly where an investment provides the potential for additional strong returns.

The deal is also particularly striking given Brewdog's founders have vocally opposed the acquisition of independent craft breweries by large corporate players in the past. To a certain extent, this calls into question what alternative exit routes might be available to TSG, with an eventual IPO appearing to be the most likely scenario. It might be argued that by retaining a majority stake in the business, founders Martin Dickie and James Watt will have more control over the ultimate exit strategy.

Additionally, the GP itself is likely to have been particularly attractive to the founders, given its track record in the segment. "There are only a certain number of investors focused on this space that have experience in the craft beer sector and have the amount of capital that was required in this case," says Sharma. Indeed, in November 2014, TSG invested alongside American beer entrepreneur Eugene Kashper to acquire US-based Pabst Brewing Company, which brews Pabst Blue Ribbon, Lone Star, Rainier and Ballantine IPA among others.

Crafting a European presence
TSG has increasingly been looking to invest in the European market, according to Sharma, with the consumer-focused GP having made a minority investment in German bicycle producer Canyon Bicycles in June 2016.

According to Sharma, the BrewDog deal is also indicative of an increasing trend for private equity players looking to take minority stakes in businesses, rather than exclusively seeking buyouts. "It definitely is an emerging trend," she says. "We have seen it across a number of very established private equity houses, which three or four years ago were looking purely at control deals. That's partly a feature of the deal environment, where sales processes are incredibly competitive and valuations continue to be high, yet there is an awful lot of capital that people have to deploy.

"As a result, private equity platforms have become much more creative in how they look at deals and how they generate returns. Additionally, GPs have an opportunity to differentiate themselves when taking minority stakes, as the emphasis is very much on the relationship, the strategic input they can bring and sectoral experience they have."

BrewDog was founded in 2007 and generated revenues of £71m in 2016 with pre-tax profits of more than £7m. The business is currently building a brewery in Columbus, Ohio, in order to meet the increasing demand from US customers, with the facility scheduled to be operational by September 2017.

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