Study: PE warms up to restaurant sector

Private equity fund managers and direct investing LPs are increasingly targeting US restaurant chains.

Private equity firms are growing their appetite for investments in US restaurant chains, according to a recent report from investment banking firm JH Chapman Group.

About 35 percent of restaurant chain mergers and acquisitions in 2013 were led by private equity funds or direct investing limited partners, up from 27 percent in 2012, the study said.

One of the recent changes in the sector is an increase in private equity firms acquiring minority positions.

Some minority investments in the study included “control features”, according to David Epstein, a principal at JH Chapman.

“Generally the control features are conditions that the equity funds must agree to that could adversely affect their investment or add risk,” he said. “For example, they normally would not want the majority owner to decide to borrow money unless the equity fund agreed. Another issue might be reorganisation; they would not want majority owners to be in a position to make the decision to file Chapter 11.”

Another trend being observed is private equity funds investing in chain restaurants chains at earlier stages compared to prior years.

“We think this is going to happen more,” Epstein said. “It is very, very attractive for the industry.”

The Southern states of the US continued to record the largest activity, with about 41 percent of the transactions targeting the region, down from 50 percent in 2012. Transactions in Western states remained relatively flat year-over-year, hovering around 27 percent of total activity.

On Tuesday, lower mid-market firm Sentinel Capital Partners acquired casual dining bar and grill TGI Fridays Restaurants for an undisclosed sum. Other private equity restaurant chain transactions this year include Golden Gate Capital’s $2.1 billion acquisition of Red Lobster from Darden Restaurants last week and Apollo Global Management’s $1.3 billion purchase of Chuck E Cheese in January.

Other fund managers investing in the sector include Los Angeles-based Brentwood Associates, which acquired California chain Lazy Dog Restaurant & Bar last July, and Catterton Partners, which invested in California-based gourmet waffle sandwich chain Bruxie in October.