How 3G Capital Uses the Private Equity Model To Build for Growth

3G Capital is a unique player in the world of private equity, known for its distinctive approach to investing and managing portfolio companies.

Private equity often gets a bad rap — and rightly so. For the layperson, the immediate vision of private equity is of corporate raiders swooping in and stripping companies for their assets. And history is full of such examples. But at the end of the day, private equity per se is merely a vehicle for engagement between investors and operating companies, and it can be used in many different ways. There are a number of firms who approach private equity in a more nuanced fashion. One of which is 3G Capital. Our analysis depicts a firm being able to get close to the companies in its highly selective portfolio so that it can roll up its figurative sleeves and work intimately with management.

While some private equity firms may have as many as 100 companies in their portfolio or focus on the next unicorn startup, 3G Capital owns relatively few enterprises and operates brands that have existed for anywhere from 50 to over 150 years. Heinz, one of its companies and now part of Kraft Heinz, was founded 154 years ago, and Hunter Douglas, its latest acquisition, was founded a hundred years ago. Burger King was born in 1954.

The companies 3G acquires are all healthy and growing, and it seems that the firm’s baseline investments are high-quality companies that have existed for decades, if not centuries. It is a strategy that 3G, under the leadership of Co-Founder and Co-Managing Partner Alex Behring and Daniel Schwartz, Co-Managing Partner, appears likely to continue into the future.

3G Uses the Private Equity Model To Focus Intently

While some investors look for a diversified portfolio that covers broad sectors, 3G’s portfolio seems designed to be focused. Yet unlike some funds that focus on a particular sector — like tech or energy — 3G seems to use a different lens to view its investment universe.

The typical private equity model is also buying companies with a three- to five-year prewritten plan to sell them to another private equity firm, during which time they hopefully keep the dishes spinning while they roller-skate. Private equity shops will put some debt on the company, pay off that debt, and hope that the company’s earnings go up. They then go and hire consultants and headhunters and hope it works out. And if it works out, they make their model work. They are investing through a portfolio lens.

And because these private equity shops are investing in dozens of companies of the same vintage, one or two of them just naturally won’t work out. It’s simply the nature of investing at scale.

A few will be average, and a few will be better, because that's the rules of a normal distribution curve. In addition, baked into most private equity deals are incentives where if a deal isn’t going very well, the shop will simply stop allocating time and resources to it, because they are focused on the assets that are going to provide their fund the greatest returns.

But Alex Behring’s 3G seems to be trying to do the exact opposite - only doing one major deal at a time, putting nearly all of its resources against the acquired company.

3G and other private equity firms are similar in that they’re all buying control. But that’s where the similarities stop.

Instead, Alex Behring and 3G seem to use their control to work closely with the companies they buy – getting their hands dirty as operators, not just sideline investors. As such, 3G seems more sensitive to leverage and more sensitive to risks, because its investments are so concentrated.

How 3G Values Partnerships With Existing Shareholders

In the way that it operates and views the world, 3G isn’t really a private equity firm. It buys one business every few years and owns for a longer time frame, partnering with existing managements and shareholders such as families and founders. Alex Behring and 3G act as owner-operators, investing in companies it owns for decades, making decisions for long-term value creation.

3G’s seems to be a model that relies on true collaboration and partnership with a company’s existing shareholders. The firm’s recent deal with window coverings manufacturer and retailer Hunter Douglas is a good example. In February 2022, 3G Capital acquired a 75% stake in Hunter Douglas, with the family patriarch selling his shares in a deal that valued the company at around $7.1 billion. The transaction was reportedly sourced through an existing relationship with the founding family. Members of the founding family have stayed on to work with Alex Behring and 3G over the long term.

It seems the family behind this crown jewel family business chose 3G because of its hands-on approach.

3G’s prior investments provide particularly potent examples of how effective its model of partnership and collaboration can be. In an environment where dealmaking by private equity firms has faced challenges due to high interest rates, recession fears, and economic uncertainties, 3G Capital's approach remains distinctive and may offer resilience in turbulent times.

In 2010, 3G Capital became Burger King’s largest shareholder, and since then has supported the company’s incredibly successful global growth transformation. Through partnership, collaboration and strategic thinking, 3G Capital and Burger King created Restaurant Brands International (RBI) as a company focused on managing and growing the world's most prominent and iconic quick service restaurant brands. Since then, RBI has acquired and grown popular Canadian brand Tim Hortons, Popeyes Louisiana Kitchen, and Firehouse Subs, in total generating around 21x in total shareholder returns. 

3G’s Culture of Ownership and Its Impact on Stakeholders

The upshot of working so closely with the companies in which it invests, seems to be a seamless level of communication between 3G, its portfolio companies, and the people from 3G at the portfolio companies. It also seems to limit how many investments 3G can realistically make using this approach.

A survey of 3G’s portfolio shows that the result tends to be businesses that have more room to weather the storm. They have higher margins, more cash flow, and less leverage, giving them tremendous flexibility to either proactively or reactively make changes when environmental, economic or geopolitical issues arise.

In terms of Alex Behring and 3G’s due diligence on a deal, it also seems that the close relationships the firm develops with key stakeholders helps it develop a keener understanding of its targets.

The investment teams working on a 3G deal, don’t seem to work on the deals for a few months and then go work on another deal. Instead they stick with the company after the acquisition, which gives the whole process an extra level of rigor.

What’s Next?

As previously reported by Reuters, dealmaking by private equity firms hit its lowest in four years in the first half of 2023, under pressure from high interest rates, recession fears, and a weak outlook for corporate earnings.

It is genuinely fascinating to anticipate the future trajectory of 3G’s deals and to observe how its small set of portfolio companies navigates this current dynamic and demanding economic environment. This outlet will be keeping a keen eye on this unique industry participant.