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Weighing the Pros and Cons of Private Equity Backing for Restaurants

Dave Huntoon

Dave Huntoon

Recently, the role of private equity in the restaurant sector has been a hot topic. While many arguments exist for and against private equity ownership of restaurants, one main theme seems to stand out – that private equity owners with a longer-term perspective are good for the restaurant business.

Overall, the influx of capital has pushed the restaurant industry in a positive direction. According to Jonathan Maze of Restaurant Business’ The Bottom Line, fueling growth of smaller chains has helped many avoid debt as they’ve tried to gain market share in their early years. In addition, the success of smaller concepts has pushed larger competitors to evolve. As our society becomes increasingly health-conscious, smaller concepts can enter the industry with innovative menus that appeal to the tastes of a more diverse consumer population. This has proven to be a positive for the restaurant industry as a whole.

Private equity owners with a longer-term perspective can provide a stable equity base and are particularly attractive for smaller firms that are too small to consider a public offering. Further, private equity firms with multiple restaurant holdings can leverage best practices across their portfolio companies without sacrificing the unique appeal of each. These long-term investments can offer strong, significant returns to investors and operators alike.

CAVA, a rapidly growing D.C.-based Mediterranean concept, is evidence of the growth that can occur if the right investor is involved. The fast-casual brand has raised more than $130 million in funding since its founding in 2011. This funding has helped CAVA to invest in new technologies to enhance the guest experience, including rollout of a new digital ordering loyalty platform. Brett Schulman, CEO of CAVA, says the system will provide a personalized experience to each guest, including rewards and mobile-payment solutions. The chain is also testing delivery, both with in-house and third-party investors. Schulman says, “This is a very long-term business initiative.”

But, private equity investors come in all shapes and sizes. Private equity firms with a short-term investment horizon do not always act in the best long-term interest of the restaurant chain. These short-term investors have been known to frequently shackle restaurant chains with unforgiving debt loads and tend to press for implementation of cost-cutting measures that, while providing short-term profit gains, can cripple a restaurant chains ability to compete over the long run.

One thing is for certain, however – private equity has grown to become an important source of capital for restaurant chains, and their influence will continue to grow in the coming years. Therefore, restaurant operators (at least those fortunate enough to have a say in the matter) interested in outside capital should be careful to identify those private equity firms committed to a longer-term investment.

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