In recent years, there has been a growing trend of private equity firms investing in restaurants and restaurant chains. Private equity firms have been attracted by the high growth potential and consolidation opportunities in the fragmented restaurant industry. As of 2021, private equity firms had invested over $80 billion in restaurant deals over the past decade. This article will analyze the key reasons why private equity firms are targeting the restaurant space and some of the major private equity deals in restaurants over the past few years.
Consolidation opportunities drive private equity interest
A key factor attracting private equity investment into restaurants is the highly fragmented nature of the industry. The US restaurant industry in particular has over 1 million individual restaurant locations. This fragmentation provides opportunities for private equity firms to consolidate regional and national restaurant chains to drive efficiencies and economies of scale. For example, private equity giant Roark Capital has been actively rolling up restaurant chains under its umbrella company Inspire Brands. Inspire Brands’ portfolio includes Arby’s Buffalo Wild Wings, Sonic Drive-In, Jimmy John’s and Dunkin’ Brands. By consolidating supply chains, marketing, and back office functions, Inspire aims to improve margins across its restaurant chains.
Strong growth trends in fast casual dining
Beyond consolidation, private equity firms also see strong tailwinds supporting growth in restaurants, especially in the fast casual dining segment. According to research firm Technomic, fast casual chains have outpaced traffic growth compared to the broader restaurant industry every year since 2015. Millennials are driving much of this growth as they tend to favor customizable, health-focused dining options. To capitalize on these trends, private equity firms have invested heavily in emerging better-for-you fast casual chains such as Sweetgreen, Cava, and Dig Inn. These chains focus on nutritious ingredients while also offering consumers a high degree of customization and flexibility for different diets and tastes.
Using debt and cash flow optimization to boost returns
Private equity firms investing in restaurants also aim to utilize leverage to boost equity returns. Restaurant chains tend to generate steady cash flows, making them compatible for debt financing. After acquiring a restaurant chain, private equity firms will often load on additional debt onto the company’s balance sheet. This added debt allows them to recoup capital quicker through interest and principal payments, while boosting overall returns. On top of leverage, private equity firms also focus on improving unit-level economics, supply chain efficiencies, and implementing technological enhancements to grow cash flows. Top private equity firms have dedicated operational resources and specialized teams to drive these initiatives.
Recent major private equity restaurant deals
Some notable recent private equity investments in the restaurant space include Inspire Brands’ $11 billion acquisition of Dunkin’ Brands, Roark’s acquisition of Buffalo Wild Wings for $2.4 billion, and Rhône Capital’s acquisition of Dutch fast food giant Quick Service Restaurants for over $2 billion. Additionally, high profile chain Sweetgreen raised $364 million from Durable Capital Partners, Fidelity Investments, and others in a recent funding round valuing the company at $6 billion. These deals highlight private equity’s growing influence across subsectors within restaurants from donuts, wings, burgers and fries to healthier fast casual.
In summary, private equity firms are attracted to the restaurant industry due to consolidation opportunities, strong growth trends especially in fast casual chains, and the ability to optimize unit economics. Leverage also allows private equity investors to realize efficiencies and boost returns across their restaurant holdings.