Private equity concerns raised by craft beer CEOs — is trouble on the way?

Go ahead and shake this headless guy’s hand. What could possibly go wrong?

The only thing we know for sure about this unprecedented period of success in the craft brewing industry is that we don’t know where it all goes from here. I suppose that’s inherent in the term “unprecedented” — we have no real previous examples from which to draw. Will the number of breweries just keep on going? Decline a bunch? Decline and then rebound? Will the big acquisitions cool off? Ramp up again? It is all anybody’s guess.

But some guesses are maybe a little more educated than others — like, say, the guesses from the only three people that can call themselves craft beer billionaires. Well, as luck would have it, those aforementioned craft beer billionaires, Dick Yuengling (Yuengling), Jim Koch (Boston Beer) and Ken Grossman (Sierra Nevada), got together to shoot the shit about beer business on stage at the Brewers of Pennsylvania Meeting of the Malts forum. No big deal.

Anyway, there was a ton of insight shared, with much of the juicy stuff captured in this great Forbes article scarily titled “Private Equity In The Craft Beer Market Spells Upheaval Within A Decade”

The gist is that the private equity acquisition trend (you know the list) all looks great now, but this type of money is used with a purpose. That purpose is to make people gobs of money in a certain, usually short, period of time. The craft CEOs on stage seemed concerned about all of the deals being made today paying off the way investors expect.

We turn to that Forbes article to put this in sharp perspective:

Despite what you might have believed, PE investors aren’t satisfied to collect off annual profits. A traditional private-equity fund, which pools money from wealthy individual and institutional investors to take equity stakes in companies, has a finite lifespan of usually 10 years. When that fund sunsets, investors expect to get paid out. A lot.

What does this mean for the industry? Of the more than half-dozen high-profile equity deals that have taken place recently, most of the PE firms will look to exit three to five years afterward, launching a rash of the resales and public offerings that the craft community so derides. If a profitable exit doesn’t look possible, the firm may hold longer, but something has to happen by the end of the fund’s 10-year lifespan, or in some cases a few years afterward if it gets an extension from investors.

I would assume that all of these craft breweries will continue to do pretty well business-wise over the next decade, at least in craft beer industry terms. But how well? Again, we are in unprecedented times. Will the benchmarks of success in the indie world translate to the cold, results-oriented environment of private equity? And say they don’t. With so many of these deals taking place at the exact same time, and potentially all being judged on similar timelines — how will their fates impact the entire segment?

Since we have no answers to those questions, let’s move to some stuff we do know. Like how a growing brewery should be handling its cost accounting.