Specialist food sector investor Isara launches GBP 300m debut fund

The new vehicle, which started its soft launch six months ago, does not have a typical permanent capital concept, partner Michael Rice told Unquote. It sees its current committed funds as an initial investment target that will gradually grow, he said.

The firm's investment thesis involves identifying the right targets where it can create value, or opportunistically responding to market developments, he said.

Isara will invest in food production and distribution businesses, aiming to stabilise the existing food ecosystem, which has become "inherently inefficient." Isara seeks to support the existing food production and supply chains that are under unsustainable levels of strain from a number of factors including the Covid-19 crisis, increasing energy costs, food inflation and financial market volatility, said Rice.

In spite of the current macroeconomic environment and the squeeze on consumer spending, Isara's investment team believes that food will be the last element where they stop spending, although they might limit their quantities or choices based on price. The firm will therefore focus on what it calls the "core elements in the consumer's basket", such as bread, milk, meat, fruits and vegetables. This is where the GP seeks to make a difference more broadly in the sector, said Rice.

Isara plans to avoid heavily concentrated areas such as the meat market, which includes strong players such as Cranswick, Hilton, Two Sisters Food Group and Eight Fifty Food Group. Instead, the firm will look at bakery broadly as a sector −not limited to bread − as well as fruit and vegetable preparation and supply. For instance, it will explore the supply of prepped fruit and vegetable for businesses producing ready meals, soups, sauces, ingredients, and sandwich fillings.

In each of these segments, the GP will have to make investment decisions where consumer trends and sustainability intersect, he added. Within bakery, for example, it would naturally go towards the free-from category. When it comes to fruits and vegetables, its decisions will be based on supply chain length and miles, he added. Overall, it will aim to lessen the carbon footprint of the businesses it invests in, creating sustainable growth.

The fund has not made any investments yet, although Rice said that the team has looked at a couple of situations over the summer but did not think the momentum was right, due to the macroeconomic environment. Rice does not expect for the fund to complete any deals imminently but it will certainly see activity in 2023.

The coming year could see Isara engage in more special situations deals than initially expected, with more opportunities arising in that space over the next six to 12 months, said Rice. "I think bluntly that that's the market we're going to be working in, where no one is certain about what's really happening, but our team has the experience to navigate that challenging environment," he said.

Isara's name is derived from the old name for the River Aire in Yorkshire. Rice leads its team and has prior experience in the food sector, as well as several years as a director with UK private equity firm Endless.

Rice is supported by Oliver McRae as investment director and Jack Price as investment manager. They all have experience working with businesses and management teams across the food sector, including Eight Fifty Food Group, Orchard House Foods, Chaucer Foods, West Cornwall Pasty Co, Heron Foods and Seabrooks, with access to a network of specialist advisors to support portfolio companies.

The team will naturally grow as the fund progresses, but it will remain a small senior team, given that it manages a flexible, specialist strategy that is not similar to the operation scheme of a traditional multi fund strategy, said Rice.

Investors
The fund is solely backed by the Sadel Group, a Luxembourg-based private family office with assets across the UK and Europe.

Sadel invests and operates in the real estate, cold storage and energy sectors, primarily focusing on supply chain security through automation, net zero and location. It can support Isara with its wide network of food producers and retailers, said Rice.

"We're a fundamental part of their family office strategy and our value creation strategy intersected with Sadel's interests in infrastructure, logistics and supply chain aspects," he said.

Investments
The fund will target traditional mid-market businesses that are either selling into grocery or into food service, predominantly focusing on B2B. The GP sees a wide opportunity to consolidate a market of about 1,000 broadly privately owned businesses, where it sees transformational potential to move the sector forward, said Rice.

The vehicle will typically target businesses with between GBP 50m and GBP 250m of turnover but would consider smaller targets as opportunistic acquisitions or bolt-ons, he said. The nature of the vehicle also means that Isara can stretch its investment upper cap to acquire business of increasing scale. It will target companies with EVs of about GBP 200m for the equity portion after refinancing, but Isara has the ability to underwrite an entire transaction and proceed with refinancing at a later point, he added.

While the fund will focus on majority shareholding investments, it has a flexible investment approach, said Rice. This will enable the GP to take a longer-term view in capital-intensive transformational projects compared with traditional private equity investors.
"An open-ended fund vehicle is so important as it allows us to escape that usual fund cycle pressure," he added.

Isara will pursue a range of strategic targets with possibilities to improve their sites, automation prospects and operational footprint in a traditional buy and build play. As a second step, the GP will look at fragmented subsegments in the food sector, where it can make bolt-on acquisitions.

Given the current volatility in the debt markets, Rice said that Isara will pay good value for assets where it has a broader value creation plan.

The GP is not currently planning for syndication or co-investment with other parties, although Rice does not exclude them from being part of the strategy in the future.

People
Isara – Michael Rice (partner).

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