Kroger doubles down on private equity

Happy Friday. Here’s what we’ve got today…

• A look at MidOcean’s collaboration with grocery chain Kroger

• The deal sheet, plus the story behind Houston’s most notable bankruptcy judge

Yesterday, MidOcean Partners and grocery chain The Kroger Co. announced the launch of MPearlRock, a new joint venture that’s hoping to find and back the next generation of consumer packaged goods brands.

The platform is characterized as a “strategic collaboration” between MidOcean and Kroger’s existing brand investment initiative, PearlRock Partners, itself launched alongside Lindsay Goldberg in 2019 as part of the Restock Kroger turnaround initiative.

In addition to Kroger’s feeding of the human spirit, Restock Kroger highlighted the company’s “alternative profit streams portfolio” as a path to add an incremental $100 million of operating profit.

Alongside PearlRock, the alternatives portfolio includes 84.51°, Kroger’s data analytics subsidiary; Kroger Precision Marketing, which manages ad sales to brands; and Kroger Personal Finance, the chain’s credit card program.

Lindsay Goldberg’s involvement, however, was evidently short-lived – though no formal announcement was ever made, the sponsor appears to have quickly exited the Kroger collaboration. There’s no mention of the firm’s participation in the partnership outside Kroger’s 2019 launch announcement, which was also the last time Kroger discussed PearlRock in any capacity.

By the summer of 2020, Fremont Macanta, a joint venture between the Bechtel family office and Terry O’Toole’s family office, had been quietly listed as Kroger’s new partner on PearlRock. The platform hasn’t publicly announced any investments.

One important holdover from Lindsay Goldberg’s fleeting participation is Brian Kelley, a former partner at the firm who was named as PearlRock’s CEO and is now taking the top job at MPearlRock. His prior CPG experience includes stints as President of Coca-Cola’s North American operating unit and as CEO of Keurig Green Mountain.

The Strategic Outline

MPearlRock is targeting control or active minority investments in North American food and beverage brands operating at between $50 - $150 million of revenue and greater than $1 million of EBITDA.

A key component of the platform’s thesis is the involvement of Kroger’s analytics imprint 84.51°, which MPearlRock has said will play a part in the firm’s brand identification and sourcing work. Post-investment, 84.51° will also provide portfolio companies with marketing-focused data and customer insights.

MPearlRock’s strategy also includes a heavy operational focus—beyond the data science angle—with the firm committing to provide portfolio companies with the expertise to optimize distribution, in-store testing, manufacturing, procurement, supply chain, and hiring.

For brands worried about what they could be signing up for, parent firm PearlRock has previously noted that its “investment decisions and brand-level strategy are managed by a team fully dedicated to growing PearlRock Partners and its portfolio brands, independent of The Kroger Company.” The firm also clarifies that an investment does not force brands into an exclusive relationship with Kroger, though may help with access to the chain’s more than 2,800 stores.

Kroger has committed its own capital to PearlRock, though its broader incentives for involvement in the effort remain unclear. At the time of PearlRock’s initial launch, industry-focused publication Retail Wire speculated that the collaboration could help Kroger expand its private label offerings, including its 11-year-old Simple Truth line.

MidOcean: The Third Investment Firm to the Party

MidOcean Partners, launched via a 2003 management buyout of Deutsche Bank’s private equity business, invests across both private equity and private credit strategies. On the private equity side, current and realized consumer investments include Fresh Pet, Jenny Craig, Nutrabolt, Casper’s Ice Cream, and Louisiana Fish Fry.

The exact structure of MidOcean’s involvement in the MPearlRock venture also remains unclear, though likely includes a commitment from the firm’s $1.5 billion sixth fund that it closed in April of last year. Early indications do point toward active participation, with MPearlRock’s team page including profiles of MidOcean investment professionals ranging from associates through operating partners and the firm’s founders.

Broadly, joint ventures with strategics have become more popular for private equity in recent years. Alongside the possibility of additional capital (that may earn management fees for the sponsor), the arrangements can provide benefits like the strategic’s industry expertise, potential synergies, and future exit opportunities for portfolio companies.

For Kroger, while there’s no brand exclusivity for portfolio companies, the grocer’s involvement may entitle it to some form of call rights, rights of first offer, or rights of first refusal for portfolio companies nearing an exit.

Any such arrangement, however, would have been heavily negotiated with both MidOcean and Fremont Macanta.

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1. The story behind Houston’s ascendancy as a restructuring venue of choice.

• How the now-disgraced David Jones made the Southern District of Texas the place to be for bankruptcy filings and where it all went wrong. — The Story of Judge Jones, the Judge who Made Restructuring Cool Again, Pari Passu

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