Flynn Restaurant Group L.P., the nation’s largest franchisee and an operator of the Applebee’s and Taco Bell brands, closed Tuesday on a $300 million strategic investment from a Canadian teachers’ pension fund, a deal that brings the company’s value to more than $1 billion.

With the investment, the Ontario Teachers’ Pension Plan, or OTPP, holds a more than 50-percent stake in the franchise operator. Joining the pension fund in the deal is Flynn Restaurant Group founder, chairman and chief executive Greg Flynn, along with other members of the franchise group’s management team, who, as a result, significantly increased their direct ownership in the San Francisco-based company.

The management team, along with OTPP, through its Teachers’ Private Capital group, has purchased the interests held by private equity firms Goldman Sachs Group Inc. and Weston Presidio, allowing those two groups to exit their investment.

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Flynn Restaurant Group, or FRG, is now the first domestic franchisee to be valued at more than $1 billion, Flynn said. The franchise group is also the first to successfully exit from conventional private equity ownership.

“We have a better growth story than many franchisors,” Flynn said.

Unlike private equity, the OTPP investment provides “evergreen capital” without the performance pressures related to fund timing that often come with conventional private equity partnerships, Flynn said.

“Many franchise owners are uncomfortable with private equity because of those timing issues,” he said.

Pension funds typically invest in private equity managed funds, but in this case, OTPP is “cutting out the middle man” by making a direct investment, said Flynn.

At the end of 2013, OTPP had net assets of $140.8 billion. According to the Wall Street Journal, it was the pension fund’s first investment in the restaurant space.

Jane Rowe, senior vice president of Teachers’ Private Capital, which manages a global portfolio valued at about $14.8 billion, said the fund has been impressed by FRG’s growth and its opportunities for expansion.

“Greg and his team have done an outstanding job of delivering strong financial results by fostering a culture of continuous improvement and by delivering a consistently enjoyable and affordable dining experience to its guests,” she said, in a statement. “We are excited to have the opportunity to support Greg and his team as they continue to execute their strategic plan and enter the next stage of their growth.”

Resources to grow

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The deal offers FRG resources to grow both its Applebee’s and Taco Bell brands, as well as through potential new acquisitions, Flynn said.

FRG operates 470 Applebee’s restaurants through subsidiary Apple American Group LLC, the largest franchise group for the casual-dining brand.

In addition, FRG owns 170 Taco Bell restaurants through subsidiary Bell American Group LLC, the third-largest franchisee of that quick-service brand.

Together, the two divisions generate about $1.4 billion in annual sales. Flynn said FRG has experienced a compound annual growth rate of 36 percent since its founding in 1999.

The group expects to open 17 new Applebee’s restaurants in 2014, along with five new Taco Bell units.

Applebee’s is franchised by Glendale, Calif.-based DineEquity Inc., and Taco Bell is a division of franchisor Yum! Brands Inc., based in Louisville, Ky.

Flynn has long said the company is looking for a third fast-casual brand to add to its portfolio, though he declined to say what the concept might be.

He noted, however, that franchised brands like Applebee’s, Taco Bell and Panera Bread have well-developed multi-unit franchise operators who may be looking to sell their companies as they retire or exit the industry. Those sellers are looking for a sophisticated, well-capitalized buyer like FRG, he said.

Still, Flynn said, “I’m not saying Panera is or isn’t,” the next brand to be added to the FRG portfolio. “But fast casual is the natural place to plant the next flag.”

Another first for Flynn

For FRG, the deal is yet another first in its ongoing attempt to break the mold for franchise companies, which have long been viewed in the investment community as “second-class citizens and traded at a discount,” Flynn told Nation’s Restaurant News.

FRG was the one of the first U.S. franchise operators to attract significant private-equity funding when Goldman Sachs first invested in it in 2001, he noted. The group later became the first franchise company in the U.S. to surpass $1 billion in sales.

Goldman Sachs’ $40 million investment helped fund the acquisition of 73 Applebee’s units. In 2005, Weston Presidio acquired the interest from Goldman Sachs for an undisclosed amount.

In 2011, Goldman Sachs reinvested in FRG through its GS Capital Partners arm, though Weston Presidio remained an investor. At the time, FRG had grown to include 270 units of the Applebee’s brand in 11 states.

Though both groups will exit from FRG, Sean Honey, a Weston Presidio partner and managing partner of affiliated private equity firm Main Post Partners, will remain on the franchise company’s board.

Contact Lisa Jennings at
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