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OPINIONFinancing

What’s the difference between sharks and most PE investors? About 3 teeth

Photograph: Winsight staff

reality check

Once again, my colleague Jonathan Maze has made a forceful case for improving our education system. It’s in the form of an argument that private equity has been a godsend for the restaurant industry, and that I must be addled to have a different net-net, as his sources in the PE world are wont to say. 

Clearly those sources must be talking over his contacts on the operations side of the business, because restaurateurs make my skepticism of private equity seem shallower than the Kardashian women. First-hand experience has taught them that baldly cheering for the private-equity boom is akin to equating piranhas with guppies because, hey, they’re all fish. 

Like me, they’re not against private equity. They’re against demolition experts who happen to wear nicer suits as they strip a business of its talent, soul and heart. And as even Jonathan acknowledges, that’s a routine modus operandi for private-equity investors. Too often with the concepts they buy, the strategy is to bleed not feed. 

Look at some of the PE-related developments of the past few days. The staffs of 19 Taylor Gourmet fast-casual sandwich shops were summarily put out of work—reportedly without a dollar in severance—because the brand’s PE investor pulled the plug on the whole chain. And the backer there is KarpReilly, one of the most respected and growth-minded PE outfits in the business. 

A move like that doesn’t just impact the people who were laid off. It’s red meat to the legions who view the restaurant industry as a pit of greed and exploitation, a hell where you certainly wouldn’t want a son or daughter to work. Let them be hired by more redeeming employers. Like a coal mine, or maybe a drug cartel.

Perhaps KarpReilly was having—brace yourselves, PE readers—a bad quarter. In that financial realm, uttering “bad quarter” is like shouting “Voldemort” at a Hogwarts dinner. That’s because the PE world logs time in three-month increments. Patience is not its signature virtue, which is why many PE firms will throw any ballast overboard, be it a celebrated CEO or half the staff, if that’ll buoy profits for the short term. 

To be sure, there are some PE firms out there with a commitment to building value instead of a fixation on short-term returns. KarpReilly has midwifed a number of the standouts in fast casual and casual dining, including The Habit, Eureka and Miller’s Ale House. 

Roark Capital and its operating companies, Focus Group and Inspire Brands, have shown that not all PE companies are buying restaurant brands for a quick payoff, as even Jonathan has noticed. 

But they and similar standouts are, alas, by far the exception. And if you look at what makes them so, it’s the ingredient that should obsess the PE pack, yet seems of secondary concern. Because they’re not operators, the firms aren’t sensitized to the importance of people, of true leadership, in making a restaurant killing. 

The net-net is that human capital is becoming far more important than the dollars and cents sort in generating sales, traffic and market value. Just ask Gene Lee of Darden Restaurants.

Until more PE firms grasp that fact, I’ll stay a champion of strategic investing. 

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