Private Equity and Craft: Find the Right Fit

Here’s some weekend food for thought… With so much attention coming from the financial community to the craft beer world, Brewbound asked Craig Farlie to pen some of his observations about the potential intersection of professional investors and craft brewers. 

Craig is a Managing Director with Farlie Turner & Company, an investment banking firm which provides merger and acquisition advisory and financing services for mid-sized companies, including those in the craft beer industry.  Since its founding more than eight years ago, Farlie Turner has received numerous industry awards for its representation of companies in a wide variety of industries.  Although his career has been focused on providing merger and acquisition and financing services, Craig has worked for some of this country’s largest and most successful corporations, including Blockbuster Entertainment, Viacom, AutoNation and PaineWebber Incorporated, before he co-founded Farlie Turner.

Craig received an A.B. magna cum laude from Princeton University and a Masters in Business Administration from the University of Pennsylvania’s Wharton School of Business.  In addition, he is an avid craft beer consumer and passionate advocate for the industry.

Here’s what he had to say:

Private equity. The very words are enough to conjure up images of slick-haired financial types dressed in Brooks Brothers suits, Hermes ties and Gucci loafers, the type of investor captured so vividly in books such as Barbarians at the Gate, The Predator’s Ball and Bonfire of the Vanities. As reports of private equity’s interest in the craft beer business have increased, many brewers have expressed concerns as to what this new-found attention from financial types may mean for the industry.

But is private equity investment in the craft beer business something that brewers should fear?  And will the involvement of more sophisticated forms of investment capital necessarily lead to the downfall of the craft beer movement?

It is my argument that private equity can be good for the industry as long as brewery owners who are looking at options to grow their business do the proper amount of homework.  Much like researching which strain of hops will work best in their latest beer, a craft brewer looking for a financial partner to aid in growth – a capital intensive proposition for those who have researched it – must take time to do the research and talk to those who have been through it before.  If the goal is to build a successful long-term partnership, the foundation needs to be strong and goals must be aligned right from the outset.  The best way to ensure this happening is to talk to a number of potential partners and find the right fit.  An advisor can often play an important role in helping to structure these conversations.

I set out to find a couple of examples of how the relationship can work productively and well.

The alignment of goals and objectives was at the top of the agenda for Tom Schlafly when he partnered with private equity firm Sage Capital out of St. Louis in December 2011.  In fact, Sage’s John Lemkemeier sees a big part of his firm’s role as helping to preserve the heritage of what founders Schlafly and Dan Kopner had built, assisting with the long-term growth of the company’s brands, and continuing to offer career opportunities to the company’s employees.

“The private equity model is not one-size-fits-all, and all private equity firms don’t operate in the same way,” stated Lemkemeier.  “We have the ability to do longer-term deals; in fact, we have a strong preference for those.  We like to do deals where the operating team remains in place.  We like to find situations in which what the company is doing is working, and our role is to help foster long-term growth.”

But that’s not to say that Lemkemeier didn’t have to overcome some early skepticism on the part of the company’s founders: “[Tom Schlafly] initially ruled out speaking with private equity…because he…said ‘It’s very important to me that the succession of this business be with a group that maintains the strategy of what we’ve been trying to build, and will maintain a long-term commitment to St Louis,” explained Lemkemeier, himself a St. Louis native.  “He thought the private equity model was going to be in conflict with that.”

Schlafly’s initial ambivalence regarding private equity was not unusual, especially in light of the widespread public distrust of the financial industry after the global recession of 2009.  The 2012 presidential election cycle, in which Republican nominee Mitt Romney was widely skewered as being more interested in personal gain than he was in the welfare of his companies’ employees, certainly didn’t help the industry’s reputation, either.

The same concerns played on the mind Greg Schirf, a co-founder of the Utah Brewers Cooperative, as he and his partners began their search for an investor to help take their growing business to even greater heights – a process that ultimately resulted in the brewery partnering with private equity firm Fireman Capital Partners in October 2012.  “I think people unfortunately have had private equity defined by politics.  [The 2012 Presidential election] muddied the waters for people who don’t understand what PE firms do,” said Schirf.  “The good PE firms such as Fireman…have a really high level of integrity and a high level of managerial insights.  This was new to me. I like to think I had been around the block, but I had…never rubbed shoulders with PE guys before.”

Using the same level of care that a brewery owner would take to screen applicants for an open Head Brewer position only makes sense when dealing with a subject as crucial as the brewery’s future, and an owner seeking financing would be wise to seek advice and ask for referrals from those in the know, as private equity is a business in which reputations certainly matter.   As in any industry, private equity contains good players with high levels of integrity and long and distinguished track records, and bad players who can often seem as if they are trying to squeeze blood from a stone.

Although he and his partners initially believed that a private equity partner might focus on reducing spending and cutting body count, Schirf soon saw firsthand that the opposite was happening after Fireman got involved: “The first person we hired was a CFO, which we’d never had before.  We’ve grown our number of employees since we’ve worked with Fireman, and we’ve added some key people that we didn’t have before that are really instrumental in where we want to go.”

Ultimately it was a careful search for a partner who could offer long-term stability and assistance with growth that led both Schlafly and Utah Brewers Cooperative to find their respective private equity firms.  Despite the perception that private equity involvement could have a negative influence on the craft beer industry, there are a growing number of breweries who have successfully made the transition to private equity ownership and are happy with the decision.  The important point is to take your time, and not be afraid to engage in multiple conversations to find the right partner – after all, this is a decision which will have long-term effects.  Engaging an advisor to assist you in your discussions can often make sense, to help translate the verbal gaps that often occur when brewers speak to potential financing partners.

“[Tom Schlafly] knew there was a succession that needed to take place in terms of capital for the business and he didn’t want to be in a position where he was rushed, or was not going to be in a position to find a capital provider who met his company’s needs,” said Lemkemeier.  “What he was looking for was an individual investment group.  Sage was it, we were just a private equity firm which was willing to meet his goals.”

Likewise, Fireman Capital Partners fit the bill for Schirf and his partners: “We wanted…to see the legacy of our company be protected.  We really wanted to grow our business and we wanted to do it in a responsible way.”