News & Analysis

driven by the PitchBook Platform
rip-chuck.png
Private Equity

Middle-market private equity firms show appetite for restaurant rebound

For investors, the US restaurant industry has always been challenging. But one PE firm’s move into the space has paid dividends.

For investors, the US restaurant industry has always been challenging, with even the most seasoned operators often recording profit margins in the single digits. And last year, during the height of the pandemic, many were forced to shut down altogether because of indoor capacity restrictions.

But with the US beginning to open up, private equity investments in the restaurant industry and other related sectors have slowly increased, with a wider dealmaking surge expected in the second half of the year, according to PitchBook’s Q1 US PE Middle Market Report. And that’s creating an opportunity for investors in the lower-middle market to jump in where larger PE firms have faltered.

Enter Mercato Partners, a Utah-based private equity shop that’s launched its own restaurant investing vehicle dubbed The Savory Restaurant Fund. Earlier this month, the firm closed a $100 million fund dedicated exclusively to backing lower-middle-market restaurants, after raising $100 million last year for the same purpose.

Savory Fund managing partner Andrew Smith said he’s never bought into the narrative that you can’t make money backing restaurants: “It’s an unearned and undeserved fallacy.”

The vehicle makes controlling investments between $6 million and $10 million, with another $10 million available for restaurant founders to tap when they’re ready to expand.

The goal: Invest in restaurants that are ready to scale and don’t require the nine-figure investments common for larger PE firms in the restaurant market. Mercato expects to hold portfolio companies for three to four years before selling.

It’s common for PE firms to set higher targets with each subsequent flagship fund, but Smith said he wanted to stay at $100 million so he could keep his investment thesis the same after returning 162% net IRR to investors for Savory’s debut restaurant fund. All while watching larger PE-backed chains struggle.

“Everything just keeps getting bigger and bigger,” Smith said, referring to the size of the investments in the restaurant industry. “The problem is the strategy they started out with changes over time because they raised such big funds.”

Before joining Mercato, Smith served as CEO of Four Foods Group, an investment firm focused on the food and beverage industry. During his career, he has watched the size of investments steadily rise, opening up a chance for smaller founder-friendly investors to step in.

“I had people like L Catterton or Roark Capital come to me eight years ago with check sizes of $10, $15, $20 million. Now, they can’t even write a check for less than $100 or $200 million.”

Restaurant chains with large debt loads from leveraged buyouts were crushed last year. Ruby Tuesday, Chuck E. Cheese and California Pizza Kitchen were among the PE-backed restaurants to file for Chapter 11 protection. All three have since emerged from bankruptcy, albeit with fewer employees and locations and without the PE firms as owners.

But many others weren’t so lucky. Overall, PE-backed restaurant bankruptcies spiked more than 300% year-over-year in 2020, according to PitchBook data.


It had a ripple effect. Roark Capital, one of the most active PE shops focused on restaurants, has made just three deals so far this year. And Sun Capital Partners has opted to abandon investing in the restaurant category altogether after more than a decade of partnering with fast-casual chains, with previous investments in Johnny Rockets and Boston Market.

Smith said Mercato’s Savory Fund doesn’t use debt as part of its investment strategy. And the firm has already pulled in roughly $400 million in profits, despite not having completed any exits from its restaurants. The fund has made a string of deals in Texas and Utah, including backing Swig, a Utah-based, fast-casual drink chain; Via 313, a popular Detroit-style pizza chain based in Austin; and Mo Bettahs, a Hawaiian BBQ chain in Utah.

Smith acknowledged there’s often tension between restaurant founders and PE firms, in part because firms demand growth, even if the company isn’t ready to expand. Other firms have piled debt onto the balance sheet, leaving them little wiggle room to invest in improving the product, and leaving the company exposed to creditors if revenue drops.

But Smith said it doesn’t have to be that way.

“It can absolutely be a phenomenal partnership, a good relationship between us as the investor and the founder,” he said. “The way we do that is we actually get in the trenches with them. Right? And listen, if they’re washing dishes, my team will be washing dishes right next to me.”

Featured image via Justin Sullivan/Getty Images

Learn more about our editorial standards.

  • adamlewis.jpg
    About Adam Lewis
    Adam Lewis was a financial writer covering private equity for PitchBook. He covered dealmaking, company and investor news for the PitchBook newsletter and blogs about the intersection of private equity and politics. A graduate of the WSU’s Edward R. Murrow College of Communication, Adam was previously a sportswriter covering the Mariners and Seahawks.
Join the more than 2 million industry professionals who get our daily newsletter!

    I agree to PitchBook’s privacy policy