Butterfly to devote 10% of fund’s net profits to food philanthropy – exclusive

Butterfly, a food- and agriculture-focused KKR spinout, plans to devote 10 percent of the net profits from its $520 million debut fund to food-related philanthropy, according to one of its co-founders.

Speaking with Agri Investor soon after the fund’s late June final close, Adam Waglay said the Butterfly Equity Foundation would undertake commitments to established food-related philanthropic organizations and direct philanthropy focused on issues such as foodwaste, childhood obesity and improving access to healthy food. He added that there were long-term plans for the foundation to raise capital itself.

“We don’t lead with the foundation as a primary reason to invest,” Waglay said. “People invest in the fund because it’s a great industry and we are going to make returns for our investors, but we do talk about the foundation. People understand that the foundation is actually a powerful way to deepen our connections in the food industry.”

A May regulatory filing showed Butterfly’s debut fund, Butterfly Fund II (named to maintain convention after the firm in 2016 raised capital to finance an investment in restaurant chain Lemonade), had raised $429 million. That included a $75 million commitment from the $35 billion Indiana Public Retirement System in June 2017.

Butterfly also raised a co-investment vehicle to finance part of its April acquisition of Bolthouse Farms, a vertically integrated food and beverage company focused on carrots and other healthy offerings, from Campbell’s Soup Company for $510 million.

Co-founder Dustin Beck told Agri Investor that, since the May filing, additional commitments from LPs that had put money into the co-investment vehicle had helped bring Fund II’s total capital past an initial target of $500 million to $520 million.

“It’s easier for LPs to underwrite a deal than a new relationship,” he said. “Virtually all of the LPs that are in the fund are co-investors, and then there are a couple of others that just started their diligence on us for the Bolthouse deal and couldn’t make it in time for final close.”

According to Beck, 80 percent of Fund II’s investors were institutions, including endowments, sovereign wealth funds, insurance companies, and US and Canadian pensions. He added that the remaining 20 percent of capital had been sourced from strategic high-net-worth investors with connections to the food, technology and finance sectors.

KKR and Vista Equity Partners, where Beck was the 12^th employee, have also invested in Butterfly, whose ten-year fund targets 3x returns, according to Waglay.

Transformational effects

Waglay has largely focused on food at KKR and in a previous role with Goldman Sachs. He said that despite the long history of private equity investment in food, there were still relatively few food-focused funds, especially when compared with sectors such as technology, energy or healthcare.

“Our whole idea of jumping off the ships we were on to do this was we thought there was a huge dislocation,” he said. “Food is a super-attractive market that didn’t have a lot of specialists, so that would be a very interesting strategy. People really love the idea of food and people really love the idea of being specialized.”

Waglay said the Los Angeles-headquartered firm’s name – which refers both to the transformational process through which caterpillars become butterflies and the ‘butterfly effect’, whereby small measures can have an outsized impact – was part of a broader effort to build a brand.

Butterfly’s strategy calls for the use of both the co-mingled fund and deal-specific co-investment vehicles. Beck said a portion of the capital for the Bolthouse investment had come from Fund II, with the remainder coming from Butterfly Generis Co-Invest, which secured $320 million from a similar mixture of LP types as were committed to Fund II.

Though Butterfly was unsuccessful in its attempt to pre-empt Campbell’s from running a sale process to find a buyer for Bolthouse, Waglay said the firm’s specialization had also played to its advantage in this instance.

“Investors in this space either like ag or they like CPG,” he said. “By Bolthouse Farms being fused together – a carrot business and a CPG business – there were a lot of people that were not interested because they did not want to take both parts of it.”

The reluctance of other buyers to take on both aspects of the Bolthouse business, Waglay said, had enabled the firm to purchase the company for one third of what Campbell’s had paid and half what the previous private equity owners had paid.

“The people that were around the table when we were there were more financial buyers that were trying to buy something really cheap, which were, frankly, very easy for us to compete against,” said Waglay.

Waglay said Butterfly would help Bolthouse to strengthen its focus on plant-based offerings. He added that the company was likely to introduce new low-sugar, high-functionality beverages within the next six to 12 months.