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Why Ascension Capital, a private equity firm backed a muesli and granola producer

South African private equity firm Ascension Capital Partners recently acquired a 45% shareholding in Paul’s Muesli, a producer of muesli, granola and cereal bars. The company was started in the 90s with founder Paul Ruiter mixing muesli for various hotel chains from his mother’s garage. Today it manufactures muesli products on contract in South Africa for food companies such as Kellogg’s, Tiger Brands and Vital.

Jeanette Clark speaks to Kabelo Moja, chief executive officer of Ascension Capital Partners, about why the firm decided to make a bet on Paul’s Muesli and South Africa’s health foods industry. He also talks about opportunities to supply the public sector and dealing with challenges such power cuts and exchange rate fluctuations. Below are slightly edited excerpts of the interview.

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Why did Ascension invest in a muesli manufacturer?

Our mandate at Ascension Capital Partners is meeting or enhancing basic human needs. Therefore, food security, healthcare, education, and water and sanitation – these are some of the sectors that we look at. The second key driver of our mandate is innovation, where we prefer [companies] that have technology underpinning their business that could potentially allow them to become a disruptor, or at the least withstand innovations from competitors.

Paul’s Muesli is a very strong player in the fast-moving consumer goods (FMCG) sector, with a strong management team and an innovator in Paul, the founder. He started the business in the early 90s from his mom’s garage, mixing muesli for hotel chains.

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The company’s products are very much in line with the trend for healthy eating and ‘snackification’, where health-conscious consumers are reaching for a granola bar instead of a chocolate one.

Have the people of South Africa jumped on the healthy snacking trend, considering their generally low income levels?

Let’s face it: granola bars and muesli products are a luxury item. It is not a staple food that you will find in every kitchen in the country. Having said that, I don’t think South Africa is lagging behind the rest of the world in terms of the trend towards being more health conscious. Trends that take hold in Europe and the US are picked up quite quickly in South Africa.

It might be a luxury product, but with the country’s growing upper- and middle-class looking at options for healthy eating, we have historically seen substantial sales increases.

Will the investment unlock new opportunities for the company?

Ascension Capital Partners is a majority black-owned fund manager and the investment in Paul’s Muesli boosts the company’s empowerment credentials. [Black Economic Empowerment (BEE) is a South African government policy aimed at enhancing the economic participation of black people in the economy. Companies with a high BEE score have a better chance of securing government contracts, all else being equal]. This opens doors for the company to expand into providing products to the public sector. These possibilities include providing products for school feeding schemes, public hospitals and even prisons.

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What are some of the potential obstacles that could hold back the expected growth of Paul’s Muesli?

As we are manufacturing in South Africa, obviously load shedding and the power supply challenges are something we have to contend with. The company has taken a view that it is here to stay and therefore needs to find ways to operate in an environment where loadshedding will most likely remain at level four for the foreseeable future. [Stage 4 load shedding means that up to 4,000MW of electricity generation capacity is not available at any given time]. We have calculated that assumption into our growth projections and are relatively confident that we can still operate well. Currently, the company has generator power for backup, but as part of our capex spend we are looking at solar solutions at the factory. The idea, ultimately, is to operate off the grid. That will only happen over some time, it will be an expensive intervention, but we believe this is where manufacturing businesses in South Africa are going.

One of the biggest concerns we have is probably exchange rate fluctuations. As we order in advance we try to anticipate what the exchange rate will do, but it is difficult.

With the ongoing Eastern European conflict, the company is alive to the fact that supply of cold-pressed oats can be constrained. As we order in advance, we can mitigate the impact to an extent. Our oats and other flavourants are predominantly imported with some being locally produced. We will look at spreading supply risk by diversifying our sources, but never at the expense of the quality of the product.

Are there any competitors on the horizon?

Paul’s Muesli does have competitors in the market; however they are not [exclusively] focused on muesli and granola bars. Where new competitors could come from is if a client decides to increase their in-house manufacturing capabilities. We want to service our clients so that there is no need for them to internalise the manufacturing of products.

Private equity firms typically aim to sell their investments after a certain period. What are the potential exit avenues for Paul’s Muesli?

We have acquired a significant shareholding in the company and the other shareholders include Paul and the management team. As a private equity fund, our mandate is not to hold assets in perpetuity; there needs to be an exit event. Usually, this event is either an acquisition by a strategic partner where a client could decide that it wants the manufacturing function to move in-house.

Alternatively, the most common or anticipated exit avenue would be to have a sale to another private equity fund, at a higher multiple than our entry. We could also look at a potential management buy-out.

In the next five to seven years there will likely be an exit event.

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