Q&A with CapitalSpring Co-Founder and Managing Partner Richard Fitzgerald
CapitalSpring Co-Founder and Managing Partner details what led to the founding of the restaurant investment firm and his vision for the future.
What inspired you to start CapitalSpring?
We launched CapitalSpring in 2005 and set out to build a best-in-class alternative asset management platform focused exclusively on the restaurant sector. In an otherwise crowded universe of undifferentiated, generalist private equity and debt investment firms, we felt sector specialization was a way to create real competitive advantage and generate strong returns for our investors. We were drawn to the restaurant sector because of its scale, long-term growth trends, and complete absence of an institutional source of flexible private capital that was exclusively dedicated to supporting restaurant brands and operators.
In early 2005, we were introduced to an experienced operator who was managing a multi-unit franchised restaurant business for an absentee franchise owner who wanted to retire. The operator was eager to acquire the stores he had been managing and had received a term sheet for a loan from a local bank, but didn't have the necessary equity to complete the transaction. This scenario had all the attractive attributes of a classic management buyout opportunity, except the operator did not have 50 private equity firms knocking on his door to help him get the deal done. This was when the lightbulb went off in our heads.
Most investment firms steer clear of restaurants given the stigma the industry has for being a risky place to invest. This being said, we were not aware of any other industries with the scale of the restaurant industry that had the same level of recurring demand…most people eat three times a day, every day regardless of weather, economic conditions or health of the capital markets. We were surprised that for such a large industry with strong trends, we could not find a dedicated source of institutional capital for restaurants other than deposit-based banks, which typically had limited flexibility and restrictions on the types of capital they could provide.
We raised $3 million from friends and family and dove in. We’ve learned many lessons over the past 14 years completing almost 200 investments across more than 50 different restaurant brands, and this industry context makes us a truly differentiated capital partner for restaurant operators.
What about CapitalSpring makes it unique?
We believe we are the most active investor focused exclusively on the restaurant industry. Our technology-driven and operationally-intensive approach to investing and portfolio optimization sets us apart from other investors who dabble in the sector. We have an in-house Strategic Operations Group with broad industry expertise that provides hands-on support to our portfolio company partners, sharing best practices learned from our experience working with hundreds of restaurant business with thousands of locations. Furthermore, we have an intensive, data-driven approach to underwriting and portfolio management and are able to leverage an enormous amount of information collected from other transactions and share insights with our partners. We can provide the same capital that any bank or private equity firm can in terms of investment structures and quantum, but working with us is different because of the strategic context we bring to the table.
For example, you may hear from a conventional lender four times per year asking you to discuss quarterly financials and covenant tests. We regularly get inbound calls from our portfolio companies asking us to help them improve their businesses with our proprietary benchmarking databases or by inviting our Strategic Operations Team to tour their stores and share best practices. We’re much more hands-on than anyone else out there and are looking to be supportive to management without the need to control the business. Having an operations-intensive and data-centric approach gives us a huge advantage in vetting and overseeing investments.
What makes CapitalSpring a good partner for restaurant operators?
CapitalSpring has evolved a great deal since its humble beginnings, as it was implicitly built to be nimble. One of our key differentiators is our sole focus on restaurant and restaurant-related businesses, which gives us unique perspective and deep industry insights. This perspective and these insights have been amassed from hundreds of transactions reviewed and completed, lessons learned and opportunities seized; we are eager to share it all with our portfolio partners to help make their businesses better.
Equally important is the flexibility to invest across the capital structure and our ability to bob and weave depending on market situations. We have the ability to craft investment solutions specific to the needs of our counterparties, allowing for a totally different type of conversation. We often surprise our partners with transaction structures they didn’t think were possible.
Lastly, we can support our investments with operational-level best practices, technology referrals and other industry insights that many conventional private equity firms and banks just don’t have available to them. Oftentimes, our portfolio companies are calling us and asking for opinions or to come out and present to their teams.
What does success look like to you?
We have worked hard over the past 14 years to establish a reputation as a fair and trusted capital partner that brings a unique offering of flexible capital solutions, unparalleled industry expertise and strategic operational resources to support our portfolio. Success for CapitalSpring is defined by the success of our portfolio companies; if they succeed, we succeed.
We are fortunate to have a significant portion of our annual transaction activity coming from repeat business or referrals from partners with whom we have worked over the years. We believe this is a direct result of our commitment to cultivating lasting relationships based on respect and trust, which we view as the foundation of our business. Success for us is being the capital partner of choice in the restaurant industry.
What does a typical transaction look like for CapitalSpring?
We really don’t have a “typical” transaction structure as we pride ourselves on offering financing solutions that are custom-tailored to the individual needs of our partners. We are not a bank selling a loan product and we are not a traditional private equity fund requiring controlling ownership of the business. A proven management team and proven restaurant concept are our only hard and fast requirements. That being said, we do have certain transaction profiles that we encounter frequently which include franchisee consolidation, partner buyouts, and revitalization of legacy brands. A couple of recent examples of this last category are our investments in NORM’s Restaurants in Los Angeles and Buddy’s Pizza in Detroit.
We began working with NORM’s, a family-owned business experiencing some generational succession challenges, near the end of 2014. Upon completing our investment in NORM’s, we set out to execute on a two-stage process to optimize the business where we first professionalized management and established a robust operational foundation, then restarted new unit growth. The initiative has resulted in EBITDA doubling on the core store base, and we hope to have six new units open by the end of 2019.
Buddy’s Pizza is a more than 75-year-old brand that is credited with creating the Detroit-style pizza. In this investment, we identified a great concept that had never fully seized its potential. We saw an opportunity for growth in this longstanding and beloved brand and laid the foundation for expansion. This entailed professionalizing the back office of the business before turning toward development. Our operational capabilities and willingness to step into projects that require incubation before growing is somewhat unique.
What future plans does CapitalSpring have in the works?
Having completed almost 200 investments across more than 50 restaurant brands over the past 14 years, we are proud to be one of the most active and experienced institutional investors focused exclusively on the restaurant sector. We plan to continue expanding our capital base and broadening the range of creative capital solutions we offer to management teams across the restaurant industry.
We will continue to invest in innovation and resources around collecting and analyzing relevant industry data and operational best practices and share this knowledge with our portfolio company partners to help them be more successful. We will also continue to grow our investment team and strategic operations personnel so we can continue to optimally support our growing number of partners and be an increasingly helpful resource to drive success in their businesses.