As private equity interest in the restaurant sector has revved up, so too has the practice of firms hiring those executives who have worked in the trenches and know the ins and outs of the foodservice business.
Not only can restaurant industry veterans bring their operational expertise to assessing investment opportunities, but they also have long relationships that can help in luring top talent to future management teams and industry insight that can translate to a healthy pipeline of deals.
Among some of the more familiar names recently to add PE positions to their résumés are Edward P. “Ned” Grace III, founder of The Capital Grille and Bugaboo Creek Steak House, and Edna Morris, a former president of Red Lobster, among other chains.
“I think PE firms recognize the value and synergies that a seasoned restaurant veteran can bring to the due diligence process as well as the operating dynamics of the portfolio restaurant companies,” said Grace, who became a senior advisor at New York-based Angelo, Gordon & Co. in the fall of 2011. “The goal is to make the right decisions for growth and development of the business and to maximize investment returns.”
While PE firms have long relied on consultants to help them vet investment opportunities, several factors are fueling the trend toward bringing restaurant expertise in-house. Among them is the renewed interest in restaurants. While the foodservice industry was a magnet for PE attention in the mid-2000s, the recession flipped the switch on that. Since 2010, however, PE firms have been courting restaurants in force. Investment bank J.H. Chapman Group LLC in its 2011 census of restaurant mergers and acquisitions recorded 22 equity- fund transactions in 2011. That number was down from 31 in 2010, but activity was expected to remain strong in 2012.
“Restaurants can be cash-flow generators that are predictable,” Grace said. “That has made our industry a very desirable target for an increasing number of PE firms.”
This year already has seen a flurry of such activity, with BIP Opportunities Fund in the past few months taking interests in both Tin Drum Asiacafé and Tropical Smoothie Café, Olympus Partners taking a stake in Centerplate Inc. in late September, Centerbridge Partners L.P. completing its purchase of P.F. Chang’s China Bistro Inc. in July, and Angelo, Gordon & Co. entering into an agreement in May to take Benihana Inc. private.
At Angelo, Gordon & Co., where the goal is to invest in concepts with growth potential, Grace said his experience allows him to evaluate opportunities realistically.
“It’s one thing for a finance guy to say, ‘Let’s get the labor cost down to 29 percent,’ and it’s another thing to bake it into reality.”
Angelo, Gordon & Co. also looks for concepts that work well in multiple locations, offer a fully capitalized return of at least 20 percent at the unit level, and have a cash-on-cash return of at least 30 percent, unit-level EBITDA of 15 percent to 20 percent, sustainable same-store-sales growth and strong management teams.
Grace said his presence in negotiations helps to build trust between the restaurant and PE teams.
“You have finance on one side and restaurant expertise on the other, and I serve as the middle guy,” he said. “I’ve been through the public offerings and the multiple exit scenarios. It’s a tremendous amount of credibility that is initially brought to the table that’s very beneficial.”
Steve Romaniello, managing director of Roark Capital Group in Atlanta, agreed, noting that Roark has long hired operations executives as firm members.
“From our perspective, our firm is driven by success in growth and operations, so it only makes good sense to have people with operations backgrounds evaluating the marketplace and opportunities and helping the companies perform and grow,” he said.
Roark has more than $2.8 billion in equity capital under management. Among the restaurant brands in its portfolio are Arby’s, Corner Bakery Cafe, Il Fornaio, McAlister’s Deli and Wingstop, in addition to Focus Brands, parent to Auntie Anne’s, Carvel, Cinnabon, Moe’s Southwest Grill, Schlotzsky’s and Seattle’s Best Coffee.
Romaniello, who, along with Roark vice president Geoff Hill, brings hospitality experience to his firm, said while Roark boasts a large number of restaurant concepts, the firm focuses on multiunit businesses.
“Geoff Hill has great experience in franchise development and does a wonderful job helping companies implement their growth plans through franchise development,” Romaniello said. “It’s done in such a way [to be] more of a support position than driving it. We partner with great teams, and they do a great job in running their businesses.”
The current focus on growth — versus on the financial re- engineering that defined PE in the 1980s — is what lured Morris to her role as managing director of Axum Capital Partners in Charlotte, N.C. Axum was formed in 2010.
“In the ’80s money was pretty cheap,” she said. “You could get a lot of debt, putting down 10 to 20 percent equity and load a company with debt, then split the company up and sell it off — that’s more re-engineering than growing strong brands. Today you can get money, but it’s not cheap like in the ’80s. You use debt for transactions, but it’s not the overwhelming part. You do it through equity and it feels different, so then it’s more critical that those [management executives] are part of your team.”
Morris said she spends 25 percent of her time shopping for restaurants, up to 30 percent of her time raising capital and the rest overseeing the portfolio, which currently includes the Wild Wing Café brand. Axum looks for concepts that are about 5 years old, with 15 to 20 units in multiple markets, sales of $100 million to $200 million and $3 million to $15 million in EBITDA. They should have broad demographic appeal and be scalable.
“I think every day about restaurant concepts and doing what is best for the brand and the investors,” she said, noting that she uses knowledge built over 30 years in the industry.
“I think that [PE] will start to attract more and more industry veterans,” she said. “There is capital that can mean growth. You can attract good people to PE when it’s about growing.”