Manna Tree Partners’ Steve Young feels “energised” by the pipeline of opportunities as the dust settles on the latest investment behind the merger of TruFood and Bar Bakers.

The Colorado-based private-equity firm, which has $600m under management focused on health and wellness in food, last month joined with Mubadala Capital to bring co-manufacturer TruFood and nutritional snacks business Bar Bakers together.

With a North America-centric remit, Manna Tree predominately targets minority interests in companies with at least $50m in revenue. A selection of current investments include: indoor-farming business Gotham Greens; cottage cheese producer Good Culture; plant-based dressings maker Urban Remedy; Health-Ade in kombucha; and grass-fed beef supplier Verde Farms.

Manna Tree managing partner Young, the former CEO of Bellisio Foods and ex-General Mills executive, chats with Just Food’s Simon Harvey, kicking off with a discussion on the opportunities ahead and the investment landscape.

Simon Harvey (SH): Do you have a pipeline of opportunities set up for this year given the investment climate has been pretty ropey?

Steve Young: It‘s been a challenging environment over the last several years. When interest rates were zero, money was free and the large-cap companies were struggling for growth. That created a massive influx of capital.

If you had an idea, the ability to fund it and a top-line growth mandate, it was how do you get as big as you can as fast as you can because if you do that, there‘s likely to be a buyer out there.

When interest rates rise, that makes capital more scarce and investors more selective. Is this a sustainable business, does this business have good unit economics and a good P&L, is the consumer loyal to the product and are they doing something that you can‘t instantly replicate?

It‘s no longer all about top-line growth. What‘s happened over the last couple of years is you‘ve had an industry in transition, you‘ve had a number of companies that have made that transition really well and you‘ve had others that have not.

We feel quite positive and energised by the pipeline that‘s out there. We feel great about the companies we‘re seeing, the founders we’re meeting and the management teams we‘re talking to. It feels like we are seeing more and more scaled assets that have been built the right way, with really good fundamentals and really good unit economics. We‘re pretty bullish on the years ahead.

SH: Are we still on the first rung of the ladder in terms of the improving environment or a quarter or halfway up?

SY: I don‘t know if it‘s the first rung of the ladder. I think things have started to improve beyond that but there are still real challenges. You can‘t look at a US-based, large-cap or mid-cap food company and not see trouble in their results.

Volumes are way down, every big food company is struggling with volumes. Their business models were driven by raising prices during Covid and post-Covid, and now you‘re struggling to get back to the buy rates they used to be at because of the inflationary environment.

We definitely see people continuing to pay a premium for things that deliver real benefits and that‘s part of why we‘re so laser-focused on health and wellness because we think that is something people, especially younger consumers, will continue to pay a premium for.

SH: Does the investment climate dictate whether you take a minority or majority stake in a business?

SY: You look at the company on its own merits, weigh the risk and return, and you structure your investments accordingly. That doesn‘t necessarily mean you move to more control investments and away from minority stakes. We have been doing more investments where we either have a greater stake or we own a majority with another partner.

SH: What food areas is Manna Tree eyeing this year?

SY: We look broadly at the landscape of health and nutrition. I hesitate to give you categories that we would say we‘re more interested in or not interested in because the reality is we were looking for big ideas that can play across the store and across the restaurant space to improve access to healthier food.

What I would say is, we look for ideas in categories that have scale, big categories where we think there‘s maybe an opportunity for a 2.0 innovation or reinvention.

We‘re not necessarily looking at really niche things that are highly specialised because at the end of the day, your ability to scale is implicitly limited and that‘s also not consistent with our investment thesis.

SH: What are your pre-investment considerations?

SY: We want to see proof of concept. We want to know where the consumer brand has got great distribution. What do its velocities look like or are its velocities stronger than the category? What are their repeat rates?

We need that proof of concept to be in place then we‘ve got the opportunity to go in and work with a company to say, here‘s capital and operating expertise to help you scale so that you can drive a bigger impact.

What we don‘t do is invest behind more venturi, unproven ideas.

SH: What's Manna Tree's investment window?

SY: We‘ve got a longer-term horizon than two, three or four years. The longer you hold an asset, the higher the bar gets on the return and so you’ve got to make sure that it‘s really growing and scaling in a profitable way so that you manage the investment side of it appropriately.

SH: Does ESG form part of your investment criteria?

SY: The way we talk about it internally is ESG and H - ESG and health. We believe that health is a sub-component of every part of ESG. We certainly hope that we are attractive to investors who are viewing their investments through an ESG lens. But what I‘d say is, we‘ve got a bigger remit and belief than simply being an ESG fund. Our criteria goes beyond that.

SH: What was the thinking behind the TruFood merger investment?

SY: The consumer desire for more protein in their diet and that is already a theme in our portfolio. That is a secular tailwind, especially in the bars and baked goods space.

What Bar Bakers and TruFood are going to be uniquely positioned to do is they will be a scaled, co-manufacturing partner that we believe really has best in-class capabilities.

Why did we invest in a co-manufacturer as opposed to a specific brand? It‘s a fragmented industry. There are so many brands playing in this space, though many of them are smaller companies that don't own their own manufacturing.

Even the large companies strategically use co-manufacturing to complement things that they do in-house, and specifically in the bars category. People want a new variety, a new flavour, a new form, a new texture and it‘s not practical to do all of that in-house.

SH: How do you apply proof of concept in plant-based, such as Urban Remedy, when a lot of start-ups are not profitable?

SY: Plant-based meats and many of the engineered meats, for lack of a better phrase, that have hit the market, that is not something we have invested in. We will always look at things like that, but I‘m still relatively bearish on a segment like that because I think consumers see it as processed.

How clean is it when you‘re engineering the meat? I think that‘s a challenge for some of the plant-based sectors.

Urban Remedy is basically plant-based salads, smoothies, juices and snacks that are all minimally processed. What they‘re trying to do is create those foods naturally from plants in a way that is consistent with anti-inflammation and help to improve people’s health.

SH: Are dairy or seafood alternatives an area Manna Tree is looking at?

SY: Our investments to date have been more in the real food space. That doesn‘t mean we wouldn‘t look at some of the alternatives but we‘d have a pretty high bar on it - do they have that proof of concept, does the consumer really want it, are they buying it, or is it something that has been invented hoping the consumer will find it?

The idea is how do we back the cleanest forms of those traditional meats and dairy?

For instance, we‘ve got an investment in grass-fed beef company Verde Farms, which is probably the highest standard of real meat you can get. It’s sourced in a really pristine way and it delivers what we believe is beyond organic, best-in-class benefits to the consumer.

We’ve got an investment in cottage cheese company Good Culture. That‘s real dairy but it‘s ultra clean and a really amazing source of protein.

SH: Is indoor, controlled-environment farming still attractive since your Gotham Greens investment?

SY: We are really pleased and proud of our Gotham Greens investment. The leafy green salad produce space, especially when you include adjacencies like fresh dips, sauces and dressings, it‘s a massive category. It‘s in every grocery store around the world, it‘s consistent with health and wellness.

The dirty little secret in that produce space, whether it‘s conventional or organic, is that most of the produce that we eat in the US has travelled hundreds, if not thousands of miles.

Most of the produce that we eat is grown in the ground where there‘s soil erosion and the broader sustainability challenges. Think about parts of the world where they don‘t have the soil to grow those leafy greens.

We love the thesis. There were a lot of players in this space. It‘s a really capital intensive business and if you get too ahead of yourself, if you don‘t have your pricing right, if you don‘t have those unit economics, it can be really tough.

We feel good about the trajectory that business is on and it’s going to have a lot of really terrific impact because it‘s providing that 2.0 idea on a really big category that‘s got some real fundamental issues to it if you dig deeper.

SH: Are you considering other investments in the indoor-farming sector?

SY: We’re really focused on Gotham Greens. We think there‘s so much upside there. I don‘t know that we‘d be looking for additional investments directly in that space, competitors in that space, or anything like that. We‘re big believers in the scalability of Gotham and that‘s where we‘re focused today.