Capital

Private Equity Firms and Restaurants in 2022

Private equity firms continue to look favorably upon the restaurant industry despite the challenges restaurants faced in the last two years and the continued labor shortages and supply chain upheavals.

Why?

According to Middle Market Growth, investors expected to see massive shutdowns in the restaurant industry following the pandemic. Instead, 2021 saw improvement, with operators showing greater resiliency than expected.

Fast-casual, quick-service, and fast-food restaurants saw the lowest number of closures. Those who turned to technology and upped their takeout and delivery game improved their expected profits despite the shutdowns. Others increased their outdoor dining and found multiple streams of income.

Private equity firms have faced recent labor challenges by turning to technology, developing a fun, team-inspired culture, and offering higher pay.

What Investors Look for in Restaurants

Investors tend to look for restaurants that offer brand awareness and have a solid base of customers who are passionate about the company. They also look for restaurants that have the potential to scale and may have proven themselves outside of their home base.

A strong, reliable cash flow and a quick and substantial growth plan also increase interest. Part of the draw for investors is a restaurant’s predictable cash flow and its resiliency. Leveraging technologies in the digital sector also attracts the many tech investors eagerly looking for brands they can get excited about.

Acquisitions and Public Offerings

The end of 2021 saw the acquisition of Firehouse Subs by Restaurant Brands International in a $1 billion all-cash transaction. 10 Point Capital acquired a minority stake in Slim Chickens in 2019. At the time of the investment, the fast-casual franchise had 85 locations. By the end of 2021, the brand had increased its units to 150.

The number of restaurant initial public offerings (IPOs) in 2021 also contributed to diminished investor weariness. About seven chains filed IPOs in 2021, including Krispy Kreme, First Watch, Sweetgreen, and Portillo’s. Portillo’s raised $405 million when it went public, and Sweetgreen’s shares rose 76% on its first trading day.

The Pros and Cons of Partnering with Private Equity Firms

On the plus side, these firms provide the funds that can fuel substantial growth. They are particularly attractive for smaller restaurant brands that are too small for a public offering.

One of the drawbacks for some restauranteurs is the reduced level of control. While owners sometimes retain complete control, it’s common for investors to have a substantial say in important decisions.

Restaurant operators also need to keep in mind that private equity firms typically stay with an investment for 3-5 years. For restauranteurs, exits from a private equity relationship may include an IPO, sale, or equity buy-back. Restaurant operators should consider looking into private equity firms committed to longer-term investments.

It takes time to find the perfect partner, which, in many ways, is what a private-equity firm is—a funding partner that can set you on an expansion course and then bow out as your ship sets sail.

Restaurants Hitting the Jackpot with Investors

In April 2021, Cava Group Inc., a Mediterranean fast-casual chain, completed a $190 million financial round that brought the company’s value close to $1.3 billion. T. Rowe Price Group led the Series F funding round. Investors included Lighthouse Investment Partners, Equilibra Partners Management, and Declaration Partners.

The chain plans to have over 500 units in place by 2025, thanks in part to their acquisition of Zoës Kitchen, which they’re in the process of converting. The company’s focus is on the healthy Mediterranean diet, and they also sell branded spreads, dips, and sauces to chains like Whole Foods Market. One of the investors suggested they were drawn to the company because of its healthy fresh ingredients and digital capabilities, such as their own app.

PitchBook reported on Mercato Partners, a Utah-based private equity shop that launched The Savory Restaurant Fund, a restaurant investing vehicle. In June 2021, they closed a $100 million fund that backed lower-middle-market restaurants. They aim to invest in restaurants when they’re ready to scale and hold the companies for 3-4 years before selling. Some of the restaurants they backed include Mo Bettahs, a Hawaiian barbeque chain in Utah, and Via 313, a Detroit-style pizza chain in Austin.

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