Harvesting Private Equity Returns From Agribusiness & Food? An Explorative Study on the World of Agribusiness & Food Industry From the Perspective of Private Equity

Abstract

The proposed thesis examines the surprising underrepresentation of leveraged buyouts (LBOs) in the agribusiness and food sectors, which appears to be unjustified given some favorable financial fundamentals. It addresses two central research questions: (1) Which financial factors drive LBO performance and are these transferable to agribusiness firms? and (2) Can an illustrative agribusiness company generate satisfactory returns via an LBO model? To answer these, the study employs an exploratory study design applying a mixed methods approach of empirical analysis via econometrics and a case study via an LBO model: First, it conducts an econometric analysis on 489 global LBO transactions (≥ USD 750 million) over 40 years, identifying key drivers of internal rate of return (IRR), through regression and applying the resulting predictive model to publicly listed agribusiness firms. Second, it investigates the impact of commodity price volatility on agribusiness operational metrics (gross margin, EBITDA margin, and free cash flow margin), as well as valuation multiples (EV/EBITDA, P/E, and share price return) via time series OLS regressions. Finally, it develops a detailed LBO model for the case study firm Marfrig Foods, by developing a forecast framework that applies qualitative analyses such as PESTEL, Porter’s Five Forces, and SWOT analyses, whose assumptions have been calibrated via the usage of Bloomberg, S&P Capital IQ, company reports, and industry forecasts. The econometric findings reveal that agribusiness firms exhibit financial profiles conducive to LBO performance, although with wider IRR dispersion linked to sector specific risks. Commodity swings have not been found to materially affect financial performance to both agribusiness and metal and mining firms, but from a valuation point of view, metal and mining companies had a significant correlation to their commodities swing, unlike agribusiness firms. The Marfrig Foods case demonstrates that, under the base case assumptions, a buyout can achieve an IRR exceeding 20%, which is the set threshold. These results challenge prevailing assumptions about agribusiness risk and suggest that the sector represents an overlooked opportunity for private equity value creation, though warranting further academic inquiry given the substantial limitations of the exploratory analyses conducted.