Finance & Food - getting the Recipe Right when investing in restaurants

A recent Harvard University study (The Operational Consequences of PE Buyouts: Evidence from the Restaurant Industry, 2016) gives us fascinating insights on how professional PE firms take an influence on the operations of the companies in their portfolios.

While there is a hardwired perception that PE firms tend to be short-term investors putting pressure on costs to maximize profitability, the main finding of this study is that PE investors actually improve operational excellence within their companies. As an example, the study points out that officially recorded HACCP violations drop by an average of 25% over the 4 years following the acquisition of a restaurant chain by a PE firm.

Interestingly, the study also shows that “restaurant deals led by partners with prior operational experience show greater improvement that those led by partners with pure financial or banking resumes”. Investors with a prior restaurant investment track-record or who partner with industry-focused diligence teams find themselves with the highest chances to achieve successful transactions.

There is no “easy industry” for investors – and restaurants, given their typical day-to-day execution challenges and the long lead time for store pipelines, are far from being a no- brainer for a financial owner with an exit horizon of 5-7 years. However, since the F&B industry also provides a highly profitable business model and vast scalability if implemented properly, industry targets sure are worth a look – even though it remains crucial to ensure all necessary expertise is on board and put to work before pulling the trigger.

On a European level the presence of large PE investors with significant restaurant experience and dedicated teams (e.g., Bridgepoint, LCatterton, Permira, Quilvest), the emergence of industry-focused PE firms (e.g., Verl, Kharis) and of funds led by former restaurant execs (e.g. Trispan, Capdesia) as well as the rise of specialized boutique advisory firms are a testimony to the growing importance of restaurants as a worthy target. Combining best-of-class concepts with professional ownership seems to be a winning recipe.