Last week, as my colleague Joanna Fantozzi reported, TSG Consumer Partners announced that it had made an investment in the 10-unit, New York City-based Mexican concept Los Tacos.
It was in many respects a standard announcement, one highlighting a brand that had quietly grown a reputation in its home market and was now ready for a bigger stage, which is what the cash infusion is designed to fund.
It was also relatively rare, at least in the post-pandemic environment. Since 2020, the pace of such private-equity investments has slowed considerably compared with pre-pandemic levels.
The investment in Los Tacos was the seventh private-equity investment in a chain with 20 or fewer locations since the start of 2024. That continues a relatively weak pace of about three such deals every year, according to a Restaurant Business count of such deals.
By comparison, there were about eight such investments in growth chains every year, on average, from 2017 through the end of 2019.
And that was down from the heyday of private-equity interest in growth brands. Between 2014 and 20216, such investments in growth chains averaged about 20 per year, with the bulk of those investments into fast-casual chains.
The decline is the result of a combination of bad investments and growing skepticism of the sector’s overall health. And maybe better thinking on the part of the investment firms.
A decade ago, private-equity firms and other investors could not get enough of the restaurant space. Seeing the success of Chipotle Mexican Grill, they snapped up interesting fast-casual names, sometimes calling brands when they had just one location.
The investment firms pushed growth that was unmanageable at times, often leading them to spend too much for new locations that they could not support. Many of these brands pulled back, and so did the investment firms.
The pandemic changed the equation even further. While the industry appeared poised for a quick rebound in 2021, it was quickly replaced by soaring inflation, a major labor shortage, weakening traffic, and then a brutal price war.
These days, there are legitimate questions about the industry and where it is headed. While sales have remained relatively stable overall, chains have overall struggled to keep pace with menu price inflation.
The average American these days visits chain restaurants about 9% fewer times every year than they did five years ago. It’s difficult to justify a full-fledged investment into a space that is losing that kind of consumer interest.
Playing a role in all this is a restaurant IPO market that is limited at best. While few growth chains ultimately go public, and it usually takes years to reach that level, it’s all part of the same process. A restaurant chain grows to a certain level using bank loans, families and friends, and then scores a private-equity investment.
That investment then helps the company grow, which can earn another investment, ultimately taking the brand to an IPO. If companies don’t think there are potential exits down the line, they will be less likely to invest in a brand. That can limit options when chains hit the market, which can discourage brands from making investments in growth brands.
To be sure, good brands can get investments in any market. The restaurant chains that are getting investments these days are winning a much tougher battle than their predecessors that often didn’t even need to leave the house to get a pile of cash thrown in their direction.
But there is no question that the market for restaurant chain financing is a lot tougher these days than it used to be.