“A Different and Special Model:” Milk Specialties Global

Welcome to Deals Uncovered by American Securities, a newsletter where we explore how we’ve partnered with a portfolio company. Each edition will feature Amy Harsch , Managing Director, Investor Relationships, and a guest from our firm who knows the business best. Subscribe here to be notified of future editions.

Our first edition of Deals Uncovered features Milk Specialties Global, which is a leading producer of dairy proteins, serving the primary markets of functional foods and sports nutrition. American Securities invested in Milk Specialties Global in August 2016 and sold the company in February 2023. Amy Harsch is joined by David Horing, Managing Director, Investment Team, to discuss what makes the company special.

Amy Harsch: Hi, David. Thanks for joining me today.

David Horing: Glad to.

Amy: In our Deals Uncovered segment, we are doing deep dives on portfolio companies to learn more about how we've partnered with companies over the course of our ownership and what makes them special. Can you tell me about Milk Specialties, a company you know well, you've served as the chair of the board for many years.

David: They’re really the leading producer of dairy proteins, and the primary markets that they serve with dairy proteins are functional foods and sports nutrition products. The demand for protein is really growing in the US. It's growing around the world. And dairy-based proteins are really the most efficacious form, so it's a business that sees really strong demand. And then Milk Specialties has a very different and special model. They compete with integrated cheese manufacturers, and so a cheese manufacturer is producing cheese, and whey is a byproduct of cheese manufacturing.

And so, if you're a cheese manufacturer, the growth that you have in your whey production is really tied to the growth you have in cheese production, which is really just one or 2% a year. The demand for whey protein is growing much faster than that. And Milk Specialties, what they do is they've developed what they call an aggregator model, where they go around to small and mid-size cheese manufacturers and on a daily basis, they collect their liquid whey. They aggregate that whey, and they concentrate the whey to produce various forms of whey protein. And because the market for whey protein is growing at a high single-digit rate, it's created a very unique and special opportunity for Milk Specialties to take advantage of that market opportunity.

Amy: And what's driving that demand for whey? Is it consumer trends and the desire for more protein?

David: Yeah, it's basically that. For years, you saw it most significantly in sports nutrition products. People use it to support exercise and to support good health. And really, today it's really seen in all kinds of functional food products that people take as part of their daily lives to get a good balance of protein in their diets.

Amy: Like the expansion to waffles and pancakes that are protein infused.

David: All of that. All of that. Yes.

Amy: Great. Over the course of our ownership, obviously we have our resources group, our team of 61 professionals that partner with portfolio companies. How did we collaborate with the Milk Specialties team to help the company grow?

David: With every investment we make, we really start the investment by working together, developing what we call a shared vision, which is a blueprint for where we see the value creation opportunity in a company over the coming years, and we did that here. We leveraged our due diligence, but we leveraged a lot of work that our strategy team and our team in China did to study consumer insights in the protein markets, and we had a lot of ideas that came out of that.

A few that I would highlight was one, we saw a big opportunity to grow this business internationally. It was largely a domestic business when we invested, and not surprisingly, there's demand and growth across the globe for protein. And there's very few countries in the world that really have significant dairy populations and are able to produce high volumes of whey, so that was a big area for us. We had a very small business where we were co-manufacturing, basically co-packing for our customers, and that was an area that was super valuable to customers and where we were able to really leverage our market position to build and expand that business. And then I'd say a third area that we really leaned into together was R&D. We invested heavily in R&D in order to create new value-added products to support our customers and support their growth plans.

Amy: Tell me a little bit more about the new markets. You mentioned expanding internationally. How did we help Milk Specialties tap into those new areas that perhaps they hadn't thought about expanding into in the past?

David: It started with research, basic research which our team was able to do to really identify which markets had what demand and what kind of growth, and then analyzing the structure of each market to determine where there would be opportunities for us. And then developing a strategy to enter those markets. We helped to hire a sales team. We actually incubated part of their sales team in our Shanghai office, and we identified specific customers for them and helped make introductions to customers, which was all geared to China to accelerate their initial growth in markets such as China.

Amy: Do you feel like having our office there in China was a significant advantage for us and for the company?

David: Yeah, it was a big help. It was a big advantage. They were able to support them in many projects. We felt like we had a lot of impact, a lot of success and growth.

Amy: So, David, it sounds like Milk Specialties had a lot of changes and had transformation over the course of our ownership. Can you tell me what you think were the biggest points of transformation for the business?

David: Sure. It was really a great company when we invested in it, but we feel like we're able to do a lot to really impact the business. A few things, I would highlight. We invested a lot of capital in the business to support a lot of different growth projects. We helped them build facilities that are allowing them to go into two new dairy protein markets for casein and caseinate. I mentioned the international growth. The company saw roughly three times growth in their international business, and it's now become a significant growing part of the company. In totality, we saw 70% volume growth and profits that nearly doubled.

And then we really spent a lot of time investing in different ESG initiatives, and we feel like we made a pretty significant impact there as well. One of the things the company does is they collect liquid whey from cheese manufacturers, and they do it by sending trucks out that transport the product. We invested in facilities to concentrate liquid whey closer to the site of where we were picking up the whey, and that has allowed us to dramatically reduce the amount of whey we transport. And with that, the volume of liquids we transport and the amount of fuel and miles that we drive. And we also invested very significantly in equipment for wastewater treatment. The company today generates roughly $130 million gallons less waste water per year than they did when we invested.

Amy: David, it strikes me that there are a lot of ways that the resources group touched Milk Specialties over the course of our ownership. Stepping away specifically from Milk Specialties but thinking more broadly, what do you think sets the resources group structure and how they work with portfolio companies apart from what other businesses might experience with other private equity firms?

David: Yeah, we think we've got a very, very different and very valuable model with our resources group. We've been building this team for over 20 years. It takes a long time to really develop some of the capabilities we have. And fundamentally, what we chose to do is build a team that is made up of senior, very experienced, functional experts. And so, what we are able to offer to a company is not somebody who is going to come in and tell them, "I see this problem. Go fix this problem," or "I see this opportunity. Go try to capitalize on the opportunity." But rather very experienced folks who will roll up their sleeves and will go in to actually execute and make these changes and make these improvements. And we think it's a model that both works very well, really creates value, really creates impact, but is also a model that management teams greatly appreciate, because we're able to not just tell them what to do but help them get things done.

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