What’s Up with Private Equity-Backed Companies in the Consumer Products Space?

In some respects, the American consumer is key to global economic growth.  This week we’ll get another reading on the state of retail in the U.S.  No doubt markets will respond feverishly.

The question here is related to the American consumer.  What do the 2016 Retail Sales figures for the U.S. portend for private equity-backed companies in the consumer products space?  Here’s a look at the connection between American Retail Sales and acquisitions of the aforementioned companies.

Acquisitions of Private Equity Backed Companies in the Consumer Products Space

Before going into the connection between the American consumer and acquisitions in the consumer products space, here’s a look at acquisitions of private equity backed companies in the consumer products space.

The acquisitions figures generally follow the business cycle.  The most recent measurement of 64 in 2014 is the all-time high, surpassing the previous high of 62 in 2008 (2015 figures have not been publicly released yet).  Overall, the current economic recovery has been just fine for the consumer products space, at least for consumer products companies backed by private equity companies.

Retail Sales

Shifting to the American consumer, here’s a look at the monthly Retail Sales figures as reported by the Commerce Department. The recent measurements, although not recessionary, are not pretty.  The American consumer’s spending is only rising at about 2 percent per year, around what inflation is doing. This could suggest that potential acquirers of private equity-backed consumer products companies may be less inclined to pull the trigger in the current economic environment.

Source: U.S. Commerce Department

The Connection Between Retail Sales and Acquisition of Private Equity Backed Companies in the Consumer Products Space

With American consumer growth relatively weak, could 2016 turn out to be a weak year for acquisitions of private equity backed consumer products companies?  Here’s a look at the connection between the two.  Perhaps not completely surprising, the two appear closely connected.

Interestingly, it appears that private equity is behind the curve when it comes to predicting economic conditions.  Prior to the last economic recession, acquisitions of private equity-backed consumer products companies peaked in 2007, about two years after Retail Sales started to decelerate (and eventually turn negative in 2008 and 2009).  In evaluating the connection, the weak American consumer activity probably suggests acquisitions of private equity-backed companies in the consumer products space perhaps declined to 50 in 2015 and may decline to around 40 in 2016.  Real weak given the period of the American economic expansion.

Conclusion

This year could turn out to be an incredibly poor year for private equity investments in the consumer products space.  The most recently available public data from the National Venture Capital Association has 64 deals in 2014.  Using some econometrics, the figure probably declined to around 50 in 2015, and may decline further in 2016 to around 40.  Although not recession-weak, for an economic expansion entering almost a decade-long in length, the 2016 figure is quite weak.