Seeing steady, recession-resistant growth in both pet ownership and consumer spending on pets, private equity investors have picked up the scent of a major opportunity.
Here, members of the Harris Williams Healthcare & Life Sciences Group and Consumer Group discuss surging private equity interest in animal health services and products, the specific areas winning the most attention, and what potential investors should prioritize.
A recent study indicates that nearly 70% of private equity investors say their outlook on animal care has been positively impacted by the COVID-19 pandemic.1 More than 70% expect investments in the sector to increase in 2021.2 Why?
Smith: For some time, the investment thesis in the sector has been centered on its resilience. We've seen that people continue to spend money on the health and well-being of their pets despite financial downturns. Once again, COVID-19 has shone a spotlight on that resilience. Through our conversations across the industry, from general practitioners to specialty hospital operators, we saw that the impact on patient volumes was delayed and muted compared to many areas of human health.
Knier: The animal care sector is now largely back where it was pre-COVID-19 in terms of volume. And a fair bit of new demand has been created through the crisis, with families taking advantage of more time at home by adopting or acquiring a pet.
Smith: In general, it's also an easier place to engage in R&D than human health. The risks tend to be lower, the research and development processes are faster, and there's less red tape to navigate. Yet pet owners see their pet's health as though it is as important as their own. So it has many of the upsides of human health and fewer downsides.
Budlong: The secular pet humanization trends only accelerated during COVID-19 as pet owners spent more time at home with their pets. This resulted in more spending on products to help them engage with their pets in fun and healthy ways.
The research also indicates that more than 60% of animal care operators are more open to private equity investment since the outbreak of COVID-19.3 What's driving that shift?
Will: This is something we're seeing across the consumer healthcare landscape. For many operators, it's been incredibly stressful and frightening to be a sole practitioner or small business owner through this crisis. In the face of this ongoing crisis and difficult operating environment, operators have become more aware of the benefits of being part of a larger organization with greater scale, stability, and financial backing.
When asked about specific areas within animal care, PEGs said they were most interested in technology products for pet owners.4 What are some of the most interesting products your group has seen?
Smith: As the services side of animal health matures, products are a logical next step for private equity. A lot of what we're seeing mirrors human technology: fitness trackers, for example, and other wearable technologies. One of the more interesting ideas is a technology that collects data from dogs that allows food and drug companies to develop more tailored, condition-specific products.
Given the strong interest in animal health, what's your best high-level guidance to prospective investors?
Knier: In terms of animal care services, investors should prioritize platforms that have a real density within the market and that provide a continuum of care. Those are the kinds of providers that are able to deeply ingrain themselves with pet owners and create stickier, higher share-of-wallet relationships.
Conversely, platforms focused solely on aggregation are less interesting—we believe differentiation is becoming more and more important in the services market versus simply achieving scale through roll-ups.
Smith: Absolutely, differentiation is key. Whether it's products or services, having a more cohesive offering that provides greater value to the customer is essential. To Whit's point, providing a greater continuum of care is a powerful strategy in services. In products, you might think about how you can use technology to enhance connections between different parts of that continuum. One example is the product I mentioned that links animal health and activity with diet and medicine. Technology is unlocking all sorts of ways for pet owners to take better care of the animals they love, and that's going to continue to create opportunities for investors.