VAIL, COLO. — Steve Young describes himself as “pretty bullish on what 2025 and 2026 will hold” for investment in the consumer packaged goods (CPG) sector. While some factors, including the pace of capital, have slowed in the recent past, Young, a managing partner with the Manna Tree private equity (PE) firm, told Food Business News the overall funding landscape looks good, particularly for companies focused on health and wellness products.

“Manna Tree’s perspective is that health and wellness is going to provide a real tailwind in the coming years,” he said. “People want to spend money on products that deliver on health and wellness for their families.”

At the same time, Young noted the cost of capital has gone up and startup activity and exits have gone down, and he predicted more exit activity regarding mid-size and smaller businesses.

“I also see private credit products coming into the market, too, more of a debt-type structure instead of investment,” he said.

What the Federal Reserve decides to do with interest rates continues to pose a big question mark. The Fed cut key interest rates twice in the past three months, for a total drop of 75 basis points since Sept. 1, and another adjustment could be made Dec. 18.

“Who knows where that will go?,” Young said, adding, “I think there tends to be a general belief that we’ll see stable rates or downward pressure on rates as the economy goes forward.”

A recent report from CoBank said potential acquisitions in the CPG sector have experienced a dip in activity but seem to be picking up as anticipated interest rate cuts and an enhanced focus on streamlining portfolios add to receptivity.

The CoBank report said the average per-deal capital investment in 2024 was $53.6 million per quarter, and the number of deals per quarter dropped below 500. That compares with $30.4 million and more than 650 per quarter, respectively, between the third quarter of 2021 and the second quarter of 2023.

Colorado-based Manna Tree focuses on growth-stage and buyout opportunities in the health and wellness consumer sector. Investments to date include Health-Ade Kombucha, Gotham Greens, Vital Farms egg producer, Good Culture organic cottage cheese, Verde Farms beef, TruFood Manufacturing snack food contract manufacturer, MycoTechnology mushroom-based ingredient manufacturer, Nutriati chickpea ingredient manufacturer, Urban Remedy organic juices and The New Primal meat snacks.

Young said this portfolio focus reflects the trend of PE players getting more bearish on the health and wellness sector in general.

“This isn’t like crypto or some sort of tech-related thing,” he said. “We see a stable environment. You’re talking about products, food or otherwise, that people use on a day in, day out basis and products that deliver on value-added benefits like health-related benefits that often see better margins than others out there.”

Some aspects of startup culture have changed, Young noted, although he said a very entrepreneurial and very vibrant landscape remains.

“There was a time, driven by an abundance of capital, when you could start your company up and not worry about profitability but focus on top-line growth, or the top line would grow so fast that the bottom line would take care of itself,” he said. “That has changed. Now you’ve got to think about the bottom line, talk about cash flow and think about unit economics because, frankly, capital could be hard to come by if you’re focusing on profits. Most positive for the entrepreneur is if you’re running at a positive cash flow and operating in a more measured way. Then you’re in the driver’s seat, and you don’t need investment from anybody.”

For some PE and CPG companies looking for acquisitions or seeking a buyout, acquisition multiples have risen lately. Recent big-ticket examples include private equity firm Blackstone, which plans to acquire the Jersey Mike’s Subs sandwich chain in a deal valued at about $8 billion; Campbell Soup Co.’s  acquisition earlier this year of Sovos Brands, Inc. for approximately $2.7 billion, and PepsiCo’s recently announced deal to purchase Siete Foods for $1.2 billion.

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Young said whether these and other valuations are reasonable depends on the company involved, but that “some valuations are probably not aligned with the market as it is today.”

“You hear in our business all the time the concept of a ‘down round,’” he said. “If (a company) capitalized in the early 2020s, it was in a different interest environment. In 2018, with zero interest rates, you saw valuations that were sky-high and now expectations have come down.

“We see more and more that companies have gotten tight. We see good, sustainable ideas now, and we believe those valuations will remain strong.”

However, some ideas linked to sustainability and better for the environment may not resonate quite as well with potential funders, Young said. These include the cultivated meat sector, which he said is “really going through a bit of a transformation.”

“You had a segment of consumers who really believed in that and others who didn’t really understand the value proposition,” he said. “Some had different views. You had a whole segment stuck in neutral, and you also had the very people who were concerned about sustainability and the impact on the environment who were the people who really didn’t want quote, unquote ‘engineered food,’ which is what cultivated meat came across as.”

Young said this scenario will be interesting to watch in the next few years.

“We think food that is clean and not overly processed is going to be very big in 2025 and 2026,” he said, adding, “It will be punctuated by the political environment.”

Young also sees investment potential in the plant-based segment, particularly involving products that are not trying to copy the flavor and texture of real meat.

“I still think that plant-based is going to be a meaningful segment of the marketplace as we move ahead,” he said. “We will always look at plant-based items as a place to drive investment and build real businesses. What’s going to change is I think we had an era of, how can we take plants and replicate a burger? How can we take plants and get close to what a non-plant-based product did? That’s a piece I don’t think we’ll see as much of.

“I think it’s ripe for things to look like what they are. The way I see it is, that non-meat burger that’s made with rice and vegetables and mushrooms and other things that provide flavor, I personally think there’s going to be more of that sort of thing than the places that are trying to replicate the taste and mouthfeel of meat.”