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Why private equity is paying big dollars for restaurant chains

Tons of dry powder and low interest rates have helped fuel the summer’s shopping spree, but buyers are still being choosy, says RB’s The Bottom Line.
Photograph: Shutterstock

The Bottom Line

Private-equity firms had a lot of money to make deals this year. And in the restaurant space, at least, they had a parade of “once-in-a-lifetime” deals to spend it on.

The result? Deals that seemed to cross boundaries when it comes to valuation and deal structure. Chains such as Sweetgreen and Cooper’s Hawk Winery & Restaurants received sky-high valuations, and buyers lined up to bid on Whataburger and Jack's Family Restaurants.

All of these are strong brands that could fetch top dollar in almost any market, being relatively unique brands with loyal customer bases and innovative offerings. But they were met with a group of buyers flush with cash.

Private-equity groups have a record amount of “dry powder,” or cash on the sidelines for them to invest.

A report earlier this year by investment firm Bain & Co. said that global private-equity firms held more than $2 trillion in dry powder in December. That’s a ton of cash they can use to buy companies and invest in others.

“There’s a ton of capital in private equity,” said Rahul Ketkar, a vice president in the New York office of private-equity firm H.I.G. Capital.

In addition, interest rates are low. So they have equity to put to work, and with lower borrowing costs, they can afford to bid higher prices than they normally would when an attractive deal comes to market, which has happened several times in the restaurant business this year.

And this summer, these groups were met with a selection of strong concepts with unique models and plenty of growth space—a handful of once-in-a-lifetime opportunities, if you will.

“There was a slow start to the year. There weren’t many deals on the market,” said Ashish Seth, who leads the restaurant investment banking practice at BMO Capital Markets, on this week’s “A Deeper Dive” podcast. “And then all of a sudden, we had an onslaught of really attractive names.”

Buyers are still choosy. They are avoiding some traditional concepts with heavy debt loads or weak sales, which has contributed to bankruptcy filings from companies such as Perkins & Marie Callender’s and Restaurants Unlimited.

To be sure, there are a lot of buyers on the lower end, such as Fatburger owner Fat Brands and Tilted Kilt owner Arc Group, as well as Landry’s and its acquisition-hungry owner, Tilman Fertitta.

But there’s a sense among those investors that there are more of the low-valuation brands available than there are buyers willing to take them on. The weak operating environment, with rising labor costs, is giving a lot of investors pause as they look at potential deals.

When a brand comes to the market with a unique offering and a strong business case, private-equity groups will go all in—and they have the money to spend. In the process, they sometimes ditch long-held investment beliefs.  

All of the companies that were sold to private-equity investors over the summer had something different to offer. In Cooper’s Hawk’s case, its wine club acts as both loyalty club and recurring revenue source. Whataburger has size and an extremely loyal following. Jack’s has a good real estate model and a brand with considerable runway.

“Each of them had a unique story,” Seth said. “Investors are looking at these businesses and saying, ‘I can get comfortable with this.’”

Time will tell if all of these prove to be good deals for the investors. But it’s certainly been a good year for good chains to test the market.

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