Restaurant investors are sitting on record levels of dry powder. At the end of June 2019, the amount of capital available for private equity fund managers to put to use (known as dry powder) surpassed the $2 trillion (with a “T”) mark.
This, combined with greater competition among private equity firms (nearly 8,000 of them globally, up from less than 5,000 just ten years ago), means many investors are looking to new sectors — particularly those that may have a potential upside because of disruption or consolidation.
While other sectors have seen significant increases in productivity historically, improvements in the foodservice industry have been minimal over the last 30 years. With the Second and Third Industrial Revolutions not having much of an impact on restaurant operations (consumer and electronics products led growth), the sector is now in a prime position to make modernization efforts and — in doing so — becomes a target for investment.
As foodservice companies are increasingly becoming a target for restaurant investors, we are seeing the following:
- The size and scale of large chains was once considered part of their strategic advantage. Now, it’s what a restaurant investor sees first in evaluating investment risks derived from disruption.
- There is an abundance of cheap capital sloshing around the global economy that’s eager to invest in the next Yelp, Chipotle, or UberEats; when a company comes along that is potentially disruptive to the $3.5 trillion global restaurant industry, investors line up to fund the future. This means emerging brands and new competitive threats can come seemingly out of nowhere and attack incumbent brands faster than they can react.
- What’s also shaping up though, is that investors, analysts, and innovators alike all share a sense of optimism and enthusiasm for the convergence of technological advancements, rapidly evolving consumer dining behaviors, massive stockpiles of corporate cash and investment capital, and the opportunity that spells for future of foodservice type investments.
- We anticipate more foreign buyers coming to the U.S., and U.S.-based investors making further investments globally. This strategy is a way to gain immediate access to a footprint, infrastructure, talent and human resources, and a regionalized know-how.
Like all transformations, a positive outcome following an investment depends on leaders’ understanding of what gives the brand value. It takes more than “good food, good service, good atmosphere” to launch, grow, and maintain a successful restaurant operation, and institutional investors, as well as private equity funds, can often step in to back new concepts or help established chains grow.
These are some of the articles investors looking to enter the foodservice space and operators seeking investment partners should be aware of.
The Most Active Private Equity Firms Globally
Private Equity firms have found a niche in the restaurant industry, where a slew of high-profile deals have made their mark in recent years. We cover their activity in North America, Europe, the Middle East and Africa, Asia Pacific, and South America.
Restaurant Activist Investors
Restaurant investors are holding $110b in publicly traded restaurant stocks. Asset management companies account for 13 of the top 15 companies in the list, and two groups are used to acting as activist investors.
Restaurant Initial Public Offerings
Public markets are another way for companies to obtain liquidity. A slew of restaurant chains have made their initial public offerings in the past few decades. For some, the move has paid off. But for others, the future is a little more murky.
How Restaurant Investors Can Help Chains Expand
Foodservice companies are increasingly turning to different sources to fund their restaurant expansions.Investors are showing more and more interest in middle-market operations, defined as businesses with between $500m and $1b in enterprise value. In the U.S., middle-market companies make up 74.1% of all PE-backed company inventory.
The Importance of Restaurant Due Diligence
There’s been a lot of investor interest in the restaurant industry as of the last ten years, and for good reason: even when economies around the world struggle, consumers continue to dine out. And even though habits might change and trends might shift, the global restaurant industry remains a force. Still, with so much Venture Capital, Private Equity, and commercial loans flowing into the space, restaurant due diligence is increasingly important.