I’ve been on a pet posting kick in advance of Super Zoo 2008 in Las Vegas, Nevada. Part of the challenge has been that the consumer dynamic in products and services has been less robust. I am planning a post about the evolution of venture investing in the health and wellness space in the coming weeks, but until then you might just have to bear with me.

In advance of my Super Zoo journey, I thought it would be interesting to look at the historical landscape of private/growth equity investing in the pet space.

The history of private equity and venture capital and the pet industry is dotted with a diverse set of investors and transaction types. We were able to identify approximately 40 parties who had raised third party capital and invested in the pet industry. With only one notable exception, the venture capital firms that invested in the Series-A of Pets.com, the majority of these parties could be characterized as private equity investors, meaning they generally favor majority transactions, including full buyouts, and focus on deals with solid growth prospects, but existing cash flow.

Of the deal we have identified, registered private placements or publicly disclosed acquisitions by private equity, approximately 50% of them involved companies that were pet products providers (notably this category had the broadest definition) . Thirty-one percent of transactions were in pet food with the balance involved in pet services. While this is logical on its face, I suspect, as I will comment on later, that this is a trend that is about to change.

Deals sizes spanned the expected continuum. The largest deal, by a significant margin was, the same deal twice. In July 2006, Leonard Green & Partners and Texas Pacific Group paid $1.8 billion ($1.68 billion for the equity with the balance being assumed debt), a 49% premium to Petco’s stock price the day prior to the announcement. This was a case of deja vu, as the same parties took the companyprivate in 2000 in a deal valued at $600 million, including assumed debt. Within two years, they sold stock to the public again, raising more than $275 million.

On the opposite side of the spectrum, Hummer Winblad, Amazon.com and Bowman Capital, invested $50 million in Pets.com, the largest pet company on the Internet as of March 1999. Hummer and Amazon were not exactly well know in the pet spaces, but that was the era where anything + .com = financable. Over the course of four successive rounds within 12 months the company raised $110 million. By December 2000, the company had announced that it was being shuttered and Petsmart acquired the domain name.

The list of investing parties includes several repeat offenders:

Allied Capital (a publicly traded business development corp) – Aspen Pet Products, Inc., sold Doskocil Manufacturing Co., Inc. in 2006; United Pet Group, Inc. a subsidiary of Spectrum Brands, Inc.; Healthy Pet Corporation sold to VCA Antech, Inc. in 2007.

Caltius (mezzanine debt fund) – BrightHeart Veterinary Centers; Healthy Pet Corporation sold to VCA Antech, Inc. in 2007.

Catterton Partners – Wellness Pet Foods, Inc., sold to Berwind Corp. in 2008, Healthy Pet Corporation sold to VCA Antech, Inc. in 2007, and Nature’s Variety.

JW Childs Associates – Ralston Meow Mix, sold to Del Monte Foods Co. in 2006; Hartz Mountain, sold to Sumitomo Corporation in 2004.

TSG Consumer Partners – Waggin’ Train Worldwide, LLC; Radio Systems Corporation (PetSafe).

On it’s face this group makes sense. Allied and Caltius are junior debt capital providers. Given the historical “late stage” orientation of pet industry investing, they fit nicely into a capital structure where the equity ownership would rather pay dividends than experience equity dilution. Catterton, TSG and JW Childs are all long standing well known firms in the consumer space and buyout oriented. Note there is not a minority growth equity investor among the group.

In my opinion, a theme that I have voiced previously, this is the past of pet investing. The brands of the pet world now — Canine Hardware, Dogswell, Dick Van Patten, Ruffwear, SimplyShe, West Paw Design, Zukes — are not private equity backed (there are small amounts of private capital in a few of them), operate profitably and really have no reason to transact with the equity community, unless it is on their own terms. This is, in my opinion, where the next wave of pet investing will take place. Investors like Maveron, Encore Consumer Capital, VMG and their ilk are well positioned to play in the next wave — investors who fund early, fund growth, and do not mind recapitalization in later stage opportunities. Many of these people learned the pet space while at one of the repeat offending firms.

I also expect that services will become a larger segment of the investment thesis over the next 12 – 24 months. Insurance, veterinary service, drug delivery and grooming services all stand to grow as the pet population grows and ages. I expect people will be more proactive with their pets medical needs and seek means to cap their downside cost. It’s simply common sense.

A list of pet related private placement activity through June 2008, includes only publicly announced deals.

/bryan

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