PRIVATE EQUITY
Pets a Good Bet:
Private Equity Zeroed In on
Animal Care, Survey Finds
JULY 2020 | katten.com
Pets a Good Bet:
Private Equity Zeroed In on Animal Care, Survey Finds
The animal care sector has been a favorite target of Our survey respondents likely had those factors in
private equity for years, due in large part to low risk, mind: 90% of private equity respondents agreed that
good returns and relatively light regulation. But with animal care is an attractive investment target, and 71%
COVID-19 prompting stay-at-home orders – and of them expect private equity transactions in the sector
perhaps a reevaluation of household priorities – animal to increase over the next year – with more than a fourth
care’s position has become even stronger, making it the saying the increase would exceed 10%.
best in show for some investors.
That’s according to a new survey by law firm Katten
Muchin Rosenman LLP. When asked in May 2020, more
than two-thirds of private equity respondents said the 61% of animal care respondents
pandemic positively impacted their outlook when it are more open to private equity since
comes to animal care. And a similar percentage of animal
care respondents have become more open to private
the outbreak of COVID-19
equity since COVID-19 swept through the United States.
This would be good news for animal care in any context.
But with some private equity firms reportedly focus-
68% of private equity respondents ing on their portfolio companies amid the economic
downturn, the optimism about animal care stands out.
said their outlook on animal care has All private equity respondents surveyed are at least
considering making external investments in animal care,
been at least somewhat positively if not outright acquisitions. Other areas buoyed by stay-
impacted by the COVID-19 pandemic at-home orders – such as information technology and
communications – are also drawing attention, according
to S&P Global Market Intelligence.
While this bullishness is remarkable – especially as the Unsurprisingly, the confluence of animal care and tech-
world braces for continued economic shockwaves – it’s nology, which had been somewhat sluggish in recent
not over the top. years, has also been accelerated by COVID-19. With
some states and the FDA loosening regulations, “the
Consider that although private equity deal and transac-
industry is ready to embrace more widespread use of
tion volume fell in the first few months of 2020, there’s
telehealth,” a spokesman for VCA Animal Hospitals,
still plenty of dry powder on the sidelines. Simultane-
which operates more than 1,000 animal hospitals in
ously, pet ownership has skyrocketed as Americans have
North America, told CNBC in April.
been mostly stuck at home for the past few months.
“Folks who don’t have animals for one reason or another, Accordingly, our survey respondents said that technol-
because of their work schedule or their travel schedule, ogy products for pet owners – along with therapeutics
that’s all changed right now,” Kitty Block, president and and diagnostics, pharmaceuticals and vaccines, and
CEO of the Humane Society of the United States, told insurance – is ripe for investment in the coming years.
Wired in April.
2
This imminent wave of M&A activity underscores the importance, for both parties, of knowing who’s on the other side of
the negotiating table. The insights gathered in the following report should be useful in that respect and will examine these
central themes:
Catalysts for Investment
Top Investment Areas
What Makes a Good Match?
Full Results
Demographics and Methodology
3
Catalysts for Investment
WHAT MOST APPEALS TO PRIVATE EQUITY We asked private equity respondents about the factors
INVESTORS WHEN IT COMES TO ANIMAL CARE? that best summarize the appeal of animal care. A slight
plurality (34 percent) noted that animal care pipelines
are relatively low risk, perhaps reflecting the recession-
1 proof nature of the sector. As Robert Ross, senior
income analyst at Mauldin Economics, wrote last year in
Pipelines are MarketWatch, companies in animal care fared well in the
relatively low-risk 34%
previous two recessions: “Pets are considered part of the
It is primarily a family now.”
cash business
30%
The research and
Other factors relate to how animal care compares with
development process 28% human healthcare, which often has cumbersome payer
is short
and reimbursement processes. Thirty percent of respon-
Insurance/third party
payer and drug pricing 9% dents said animal care is appealing because it’s primarily
risks are minimal
a cash business, while 9 percent said as much because
insurance/third-party payer and drug pricing risks are
minimal. Twenty-eight percent said that the research
and development process is short, making it less expen-
sive and thus a more attractive investment. Animal
Health Invest USA, which seeks to connect animal care
businesses with investors, made similar comparisons,
adding that animal medicines and vaccines face lower
pressure from generic competition.
WHAT ARE THE TOP TWO CATALYSTS DRIVING In our survey, animal care and private equity respon-
ANIMAL CARE INVESTMENTS? dents agreed that valuations were a primary catalyst for
investment in animal care – but the similarities ended
there. Private equity was far more focused on oppor-
2 tunities for organic growth (57% compared with 26%),
the fact that the sector is fragmented (30% compared
with 23%) and low barriers to entry (19% to 9%) – while
Current valuations 43%
animal care respondents pointed to the continuous
Opportunities for growth of pet ownership (36% to 26%) and low reim-
organic growth 40% bursement risk relative to human healthcare (21% to
Continuous growth
15%). Given private equity’s focus on growth, these dif-
of pet ownership 31% ferences are perhaps not that surprising.
Market fragmentation/
25% We also asked respondents about the market character-
low consolidation
istics leading to investment. Current market demand led
Low reimbursement
risk relative to human 18% the way for animal care and private equity. After that,
health private equity was much more focused on regulatory
Low barriers to entry 13%
freedom and resistance to economic cycles. Animal care
respondents, though, rated the investment firm’s experi-
ence as a top priority, a recurring theme in the survey.
Other 4%
And even as COVID-19 is believed by many to be a
reason for confidence in the sector, some private equity
respondents had concerns. “We worry about the current
economic climate as it relates to the COVID pandemic,”
one said. Others noted that, “It is unclear as to how dis-
tancing and safety measures will impact productivity”
and that, “A second coronavirus wave could derail our
plans. It is such an unknown.”
4
Top Investment Areas
WHICH OF THE FOLLOWING AREAS REPRESENT THE GREATEST INVESTMENT OPPORTUNITIES
IN ANIMAL CARE OVER THE NEXT TWO YEARS, FROM YOUR PERSPECTIVE?
3
Pe Ac
Private equity Animal care
Therapeutics and diagnostics 47% 38%
Technology products for pet owners 36% 28%
Pharmaceuticals and vaccines 34% 23%
Insurance 34% 23%
Telemedicine/telehealth 23% 23%
Basic veterinary care 19% 17%
Premium/dietary-specific food 4% 17%
For all respondents, therapeutics and diagnostics rep- When examining investment opportunities, some impor-
resented the greatest investment opportunity over the tant takeaways emerged when comparing the responses
next two years. With pet ownership high and getting from private equity and animal care. Private equity was
higher – an American Pet Products Association report generally more bullish, except for telemedicine/tele-
released before the pandemic found that 67 percent of health and in the area of premium/dietary-specific food.
U.S. households have pets – there are more pet owners The difference in the area of technology is perhaps a sign
who will want to find out what’s wrong with ailing pets that investors see such products as an untapped market
and pay for treatment. and are on the lookout for game-changing innovations.
They want to know not only what’s wrong with ailing “Apps and devices are now offering pet owners a more
pets but also how to prevent issues in the first place. intimate look at their animals’ well-being, from veterinary
Sixty percent of respondents who chose therapeutics care to fitness,” according to a late 2019 report in Axios,
and diagnostics said their feelings were based on broad which highlighted innovations in pet fitness trackers,
interest in preventive wellness. They emphasized an camera monitoring and intercoms and telehealth options.
interest in cannabinoid and hemp-based products (which
typically include treats and oils for pets) and mobility-
related therapies. Forty-eight percent picked advance-
ments in screening procedures, and 40% identified
something more emotional – the humanization of pets.
This trend likely explains why technology products for
pet owners was the second-most promising investment
area among survey respondents. The market for such
products is growing and includes devices that play music
designed to calm pets, translating devices that allow
owners to be more attuned with their pets’ needs, a
treadmill for dogs, sunglasses for cats and dogs, a device
that monitors litter box output and even prosthetic
replacements for ears, eyes and testicles – to eliminate
neuter-hesitant concerns.
5
What Makes a Good Match?
WHAT DOES PRIVATE EQUITY MOST VALUE IN
ANIMAL CARE TARGETS?
4 We asked private equity respondents about the charac-
teristics they would consider when investing in animal
Profit margin care. We also asked animal care respondents what they
projections 93%
wanted investors to demonstrate knowledge of during
Internal rate of
89% a pitch. The results were strikingly similar – with each
return (IRR)
group picking four of the same top five choices, albeit in
Absolute return 81% different orders.
Overall capital
requirements
81%
Valuation projections 77%
Early exit opportunity 75%
Good portfolio fit
with company 68%
Merger/acquisition
68%
potential
WHAT DO ANIMAL CARE BUSINESSES MOST Many of the top choices (profit margins, valuation pro-
VALUE IN PITCHES FROM PRIVATE EQUITY? jections, etc.) revolve around bullish feelings for the
sector and general deal-making criteria. We also asked
5 animal respondents what they wanted in an investor, and
while responses varied, knowledge of or experience with
Absolute return
the veterinary profession was a common hope, though
potential 93% there were others. One respondent said, “not every
hospital can operate the same,” and investors should be
Profit margins 90% “willing to take risks with specific ideas from the team
about what works with their current client base.”
Valuation projections 88%
Another respondent said it was important to “take proper
Internal rate of care of the staff that helped build us to where we are. Our
return (IRR)
83%
business sells experience and relationships, not medicine.”
Good portfolio fit
with company 78% Animal care respondents valued portfolio fit more than
private equity (78% compared with 68%), but knowledge
Capital requirements 78% of and experience in the sector is an asset for private
equity firms as well. Those that don’t understand animal
Merger/acquisition
viability 73% care can end up paying too much for investments and may
miss opportunities to find efficiencies, streamline opera-
tions – or ultimately sell full platforms for big paydays.
All of this will be important to consider given where
things are headed. The vast majority of private equity
respondents (90%) expect consolidation in the animal
care market over the next two years.
6
Full Results
(Asked to private equity only):
HOW WOULD YOU SAY THAT YOUR OUTLOOK ON ANIMAL CARE AS AN INVESTMENT TARGET MAY
HAVE CHANGED SINCE FEBRUARY 2020, OR PRIOR TO THE COVID-19 PANDEMIC? OUTLOOK FOR
ANIMAL CARE ______________.
23% 45% 9% 17% 6%
Has been very Has been somewhat No change Has been somewhat Has been very
positively impacted positively impacted negatively impacted negatively impacted
(Asked to animal care only):
HOW HAS YOUR BUSINESS’S STANCE ON PRIVATE EQUITY CHANGED, IF AT ALL, SINCE
FEBRUARY 2020, OR PRIOR TO THE COVID-19 PANDEMIC?
8% 53% 36% 2% 2%
We are significantly more We are somewhat more No change We are somewhat less We are significantly less
open to private equity open to private equity open to private equity open to private equity
7
Full Results
(Asked to private equity only):
TO WHAT EXTENT DO YOU AGREE WITH THIS STATEMENT: ANIMAL CARE IS AN ATTRACTIVE PRIVATE
EQUITY INVESTMENT TARGET.
26% 64% 8% 2% 0%
Strongly Somewhat Neither agree Somewhat Strongly
agree agree nor disagree disagree disagree
(Asked to private equity only):
WHAT WOULD YOU EXPECT TO SEE IN TERMS OF ANIMAL CARE PRIVATE EQUITY TRANSACTIONS
OVER THE NEXT YEAR?
26% 45% 26% 4% 0%
Increase significantly Increase somewhat Remain the same Decrease somewhat Decrease significantly
(exceeding 10%) (exceeding 10%)
8
Full Results
(Asked to private equity only):
TAKING THE ECONOMIC IMPACT OF THE COVID-19 PANDEMIC INTO ACCOUNT, WHICH CATEGORIZE(S)
YOUR FIRM’S NEAR-TERM POSITION ON THE FOLLOWING PRIVATE EQUITY INVESTMENT ACTIVITIES?
10
Focus exclusively
on current portfolio 58% 36% 6%
companies
Taking over
38% 51% 11%
businesses
Making investments
in businesses 68% 32%
(external)
A Already doing C Considering doing D Does not apply
(Asked to animal care only):
TAKING THE ECONOMIC IMPACT OF THE COVID-19 PANDEMIC INTO ACCOUNT, WHICH CATEGORIZE(S)
YOUR BUSINESS’S NEAR-TERM POSITION ON THE FOLLOWING PRIVATE EQUITY INVESTMENT
ACTIVITIES?
11
Trying to sell
5% 55% 40%
business(es)
Accepting
investments 21% 70% 9%
in business(es)
A Already doing C Considering doing D Does not apply
9
Full Results
(Asked to private equity only): 12
WHICH OF THE FOLLOWING BEST
Pipelines are
SUMMARIZES THE APPEAL OF ANIMAL relatively low-risk 34%
CARE IN PARTICULAR TO PRIVATE EQUITY
It is primarily a
INVESTMENT? cash business
30%
The research and
development process 28%
is short
Insurance/third party
payer and drug pricing 9%
risks are minimal
WHAT ARE THE TOP TWO (2) CATALYSTS
BEHIND INVESTMENT ACTIVITY IN THE
ANIMAL CARE MARKET?
13 14
Current valuations 43%
Pe Ac
Private equity Animal care
Opportunities for
organic growth 40%
Current valuations 43% 43%
Continuous growth Opportunities for organic 57% 26%
of pet ownership 31%
growth
Market fragmentation/ Continuous growth of pet 26% 36%
low consolidation 25%
ownership
Low reimbursement
risk relative to human 18% Market fragmentation/ 30% 21%
health low consolidation
Low barriers to entry 13% Low reimbursement risk 15% 21%
relative to human health
Other 4% Low barriers to entry 19% 8%
Other 4% 4%
10
Full Results
(Asked to private equity only):
NOW LET’S THINK ABOUT SOME OF THE MARKET AND ENVIRONMENT CHARACTERISTICS THAT
YOU OR YOUR FIRM WOULD EVALUATE IN CONSIDERING AN INVESTMENT IN ANIMAL CARE. PLEASE
INDICATE THE IMPORTANCE OF EACH FACTOR:
15
Vi Si N Ni
Very important Somewhat important Neutral Not important
Current market demand 55% 33% 10% 3%
Resistance to economic cycles 55% 28% 15% 0%
Regulatory freedom 38% 45% 13% 5%
Forecasted market demand 43% 38% 20% 0%
Level competition in the market 50% 30% 15% 5%
New category/innovation 48% 33% 15% 5%
Our firm’s experience 40% 38% 18% 5%
Products/services have open access to the market 38% 38% 18% 5%
Established distribution channel/client base 40% 35% 10% 8%
(Asked to animal care only):
NOW LET’S THINK ABOUT SOME OF THE MARKET AND ENVIRONMENTAL CHARACTERISTICS THAT YOU
OR YOUR FIRM WOULD EXPECT AN INVESTOR TO INCORPORATE INTO A PITCH TO BUY SOME SORT OF
STAKE IN YOUR OPERATION. PLEASE INDICATE THE IMPORTANCE OF EACH FACTOR:
16
Vi Si N Ni
Very important Somewhat important Neutral Not important
Current market demand 58% 38% 3% 3%
Investment firm’s experience 55% 33% 13% 0%
Forecasted market demand 50% 35% 13% 3%
Established distribution channel/client base 38% 48% 13% 3%
Resistance to economic cycles 40% 43% 15% 3%
Level of competition in the market 30% 50% 20% 0%
Regulatory freedom 28% 46% 21% 3%
11
Full Results
WHICH OF THE FOLLOWING 17
AREAS REPRESENT THE
Therapeutics and
GREATEST INVESTMENT diagnostics 42%
OPPORTUNITIES IN ANIMAL
Technology products
CARE OVER THE NEXT TWO for pet owners
32%
(2) YEARS, FROM YOUR
Pharmaceuticals and
PERSPECTIVE? PLEASE SELECT vaccines 28%
ALL THAT APPLY:
Insurance 28%
Telemedicine/
telehealth 23%
Basic veterinary care 18%
Premium/dietary-
specific food 11%
Other 1%
(Asked to those who selected 18
“Therapeutics and Diagnostics” in Interest in
previous question): preventative 60%
wellness options
WHICH OF THE FOLLOWING
Advancements in
CONTRIBUTED MOST TO YOUR screening procedures 48%
SELECTION OF THERAPEUTICS Humanization of pets
AND DIAGNOSTICS AS AN in general 40%
INVESTMENT OPPORTUNITY?
PLEASE SELECT THE TOP TWO (2): Digital ecosystem 26%
Advancements in
surgical procedures 24%
Other 2%
12
Full Results
(Asked to those who selected 19
“Preventative Wellness” in previous
Cannabinoid and
question): hemp-based products 52%
THINKING SPECIFICALLY ABOUT
Mobility-related
ALTERNATIVE THERAPIES AS A therapies
44%
WELLNESS OPTION, WHICH OF
THE FOLLOWING DO YOU BELIEVE Other 4%
REPRESENTS THE MOST LUCRATIVE
OPPORTUNITY FOR INVESTMENT
OVER THE NEXT TWO (2) YEARS?
PLEASE SELECT ONLY ONE:
(Asked to private equity only):
LET’S THINK ABOUT SOME OF THE FINANCIAL CHARACTERISTICS THAT WOULD COME INTO PLAY
IN CONSIDERING AN INVESTMENT IN ANIMAL CARE. PLEASE INDICATE THE IMPORTANCE OF EACH
FACTOR:
20
Vi Si N Ni
Very important Somewhat important Neutral Not important
Profit margin projections 53% 40% 7% 0%
Internal rate of return (IRR) 40% 49% 6% 5%
Absolute return 53% 28% 15% 4%
Overall capital requirements 53% 28% 15% 4%
Valuation projections 45% 32% 17% 6%
Early exit opportunity 49% 26% 17% 8%
Good portfolio fit with company 47% 21% 23% 9%
Merger/acquisition potential 38% 30% 28% 4%
13
Full Results
(Asked to animal care only):
WHICH OF THE FOLLOWING WOULD BE MOST IMPORTANT FOR AN INVESTOR TO COMMUNICATE
OR DEMONSTRATE KNOWLEDGE OF IN MAKING A PITCH TO BUY SOME SORT OF STAKE IN YOUR
OPERATION? PLEASE INDICATE THE IMPORTANCE OF EACH FACTOR:
21
Vi Si N Ni
Very important Somewhat important Neutral Not important
Absolute return potential 63% 30% 3% 5%
Profit margins 60% 30% 10% 0%
Valuation projections 43% 45% 13% 0%
Internal rate of return (IRR) 43% 40% 18% 0%
Good portfolio fit with company 38% 40% 23% 0%
Capital requirements 30% 48% 18% 5%
Merger/acquisition viability 30% 43% 20% 8%
(Asked to animal care only):
ARE THERE ANY OTHER FINANCIAL FACTORS THAT YOUR OPERATION WOULD EXPECT TO SEE AN
INVESTOR COMMUNICATE OR DEMONSTRATE KNOWLEDGE OF IN MAKING AN INVESTMENT PITCH?
22
Yes 32%
No 68%
*A plurality of respondents who said “Yes” to this question
noted the importance of knowledge of the field.
14
Full Results
(Asked to private equity only):
PLEASE INDICATE YOUR AGREEMENT WITH THE FOLLOWING STATEMENT: PRIVATE EQUITY WILL DRIVE
CONSOLIDATION IN THE ANIMAL CARE MARKET OVER THE NEXT TWO (2) YEARS.
23
26% 64% 9% 2% 0% 0%
Strongly Somewhat Neither agree Somewhat Disagree Strongly
agree agree nor disagree disagree disagree
15
Demographics and Methodology
In early May 2020, Katten Muchin Rosenman LLP surveyed 47 individuals involved in private equity and 53 involved in
the animal care industry about trends in the industry, the investment climate and other topics. To qualify for the survey,
respondents from each segment had to either have participated in a private equity/animal care transaction over the past
two years or indicate likelihood to participate in such a deal in the future. In addition, only decision-makers qualified to
take the survey.
Due to rounding and multiple-choice options, total percentages for some questions surpass 100%. The respondents were
screened using the following criteria.
Q1. WHICH BEST DESCRIBES YOUR 24
BUSINESS FOCUS? # %
Number Percent
Private equity 47 47%
Animal care 53 53%
Q2. (Asked to private equity only): 25
HAVE YOU OR YOUR ORGANIZATION
# %
PARTICIPATED IN AN ANIMAL
CARE-RELATED PRIVATE EQUITY Number Percent
INVESTMENT OR DEAL OVER THE
Yes 30 64%
PAST TWO YEARS?
No 17 36%
Q3. (Asked to private equity only who 26
selected “No” in Q2): # %
HOW LIKELY ARE YOU OR YOUR
ORGANIZATION TO CONSIDER A Number Percent
PRIVATE EQUITY INVESTMENT IN ANY Very likely 12 71%
ANIMAL CARE-RELATED BUSINESS?
Somewhat likely 5 29%
16
Demographics and Methodology
Q4. (Asked to private equity only): 27
WHICH BEST DEFINES YOUR ROLE IN
PRIVATE EQUITY TRANSACTIONS? # %
Number Percent
Primary decision-maker 28 60%
Share in decision-making 19 40%
Q5: (Asked to animal care only): 28
HAVE YOU OR YOUR ORGANIZATION # %
PARTICIPATED IN A PRIVATE EQUITY
INVESTMENT OR DEAL OVER THE Number Percent
PAST TWO YEARS? Yes 17 32%
No 36 68%
Q6. (Asked to animal care only who 29
selected “No” in Q5): # %
HOW LIKELY ARE YOU OR YOUR
ORGANIZATION TO CONSIDER A Number Percent
PRIVATE EQUITY INVESTMENT IN Very likely 4 11%
THE BUSINESS?
Somewhat likely 32 89%
Q7. (Asked to animal care only): 30
IN THE CASE THAT YOUR BUSINESS # %
WAS APPROACHED BY INVESTORS
AS A POTENTIAL PRIVATE EQUITY Number Percent
TARGET, WHICH BEST DEFINES YOUR Primary decision-maker 33 62%
ROLE IN THE DECISION-MAKING
Share in decision-making 20 38%
PROCESS?
17
About Katten
With more than 700 attorneys serving public and private companies, Katten is the firm of choice for clients seeking
sophisticated, high-value legal services in the United States and abroad. Our collaborative, entrepreneurial culture
leads to true partnerships with our clients. We understand and focus on our clients’ business objectives and address
their legal needs in a manner consistent with their “big picture.” We have a reputation for being trusted advisors,
and we demonstrate our value every day in the successful results we deliver.
About Katten’s Private Equity Practice
To get good deals done, private equity investors must contend with sky-high valuations, compressed timelines
and unprecedented competition. When opportunities do appear, the stakes are high and investment parameters
complex. Katten cuts through the legal issues that bottleneck deal flow and provides the immediacy, intelligence
and integrity private equity investors demand.
Kimberly T. Smith Kenneth W. Miller Christopher S. Atkinson
+1.312.902.5411 +1.312.902.5261 +1.312.902.5277
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