Minority investments brewing in the UK craft beer space

In September, L Catterton agreed to acquire a 27.9% stake in Edinburgh-based craft brewer Innis & Gunn for £15m. The deal marked the second time in five months that a US-based GP has invested in a Scottish craft brewer, after TSG Consumer Partners invested £213m for a minority stake in Aberdeenshire-based Brewdog in April.

While two transactions do not constitute a trend, both deals are notable for their similarities. In each case, the entrepreneurs retained controlling stakes, while both companies are currently implementing identical two-pronged growth strategies: expansion into the North American market and the development of own-brand bar chains in the UK.

In the face of a rapidly expanding market, brewers are facing increasing challenges to grow at speed in order to retain market share. According to research by chartered accountants UHY Hacker Young, the number of UK brewery businesses increased by 65% from 1,026 to 1,692 between 2011 and 2015.

More strikingly still, according to business finance platform Funding Options, the turnover of the UK's 30 largest independent craft brewers increased by 44% in the most recent financial year. It certainly appears to be the case that many of the more prominent independent brewers are beginning to outgrow the crowdfunding model originally adopted by both Innis & Gunn and Brewdog.

The turnover of the UK's 30 largest independent craft brewers increased by 44% in the most recent financial year – Funding Options

Innis & Gunn raised £3m from the issuance of "beer bonds" in 2015, followed by a £2.4m equity crowdfunding campaign the following year, some way short of the £15m invested by L Catterton. Yet, as well as pursuing a larger funding round, the brewer was also keen to tap into the strategic knowhow of private equity backers. "Our board concluded that if we could find the right investor for the business, we could grow much faster," chairperson Tony Hunt tells unquote". "However, we wanted more than money from that investor. We wanted someone who could actively contribute to the development of our international business."

The high-growth nature of the craft brewing sector in the US has made it highly attractive to private equity. Indeed, prior to investing in Brewdog, TSG invested alongside American beer entrepreneur Eugene Kashper to acquire Pabst Brewing Company in 2014. More recently, in 2016, Fireman Capital acquired Cigar City Brewing and Ulysses Management bought Victory Brewing to merge it with portfolio company Southern Tier. Yet with the US market maturing, it appears some of the country's private equity firms are turning their attention to the relatively less developed European space, and the UK market looks likely to benefit.

"We are likely to see an increasing number of deals in the [craft alcohol production] space in the UK over the coming years," says Kiran Sharma, a partner in the private equity team at law firm Ropes & Gray, which advised TSG on the Brewdog deal. "And that trend most probably won't be confined to the beer segment alone. A number of related sectors are evolving; craft gin, tequila, and various other verticals are becoming increasingly popular. Some remain niche whereas others have the potential for mass market appeal."

Bitter aftertaste
UK-based competitors of Brewdog and Innis & Gunn have in recent years been the target of global trade buyers. In 2015, SABMiller acquired Meantime Brewing and AB Inbev acquired Camden Town Brewery, while in July of this year Carlsberg acquired London Fields Brewery. However, while competition from global conglomerates is likely to drive prices upwards, the Brewdog and Innis & Gunn deals suggest founders might be starting to view the sales of minority stakes to GPs as the most palatable option in order to raise growth capital, take equity off the table and ultimately retain control of their businesses.

This may be partly because the acquisition of micro-brewers by global conglomerates is viewed by many as the antithesis of craft brewing. Indeed, Brewdog pulled Camden's products from its bars after the AB Inbev deal, while Carlsberg's acquisition of London Fields caused Mike Benner, the chief executive of trade body The Society of Independent Brewers, to release a statement saying: "Consumers deserve to know that what they are buying is a genuine craft-brewed beer, as research clearly shows that most beer drinkers believe craft beer to be produced by relatively small, independent brewers."

If owners are becoming reluctant to sell their companies to trade buyers, it calls into question what alternative exit routes might be available to private equity backers, with an eventual IPO appearing to be the most immediate scenario. However, setting aside the £1bn valuation achieved by Brewdog in the TSG deal, most British microbreweries are achieving valuations in the small-cap and lower-mid-cap ranges, resulting in a highly fragmented market that leaves the door open for potential SBOs by larger players making consolidation plays. The micro brewers of today could yet become the conglomerates of tomorrow.

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