How CapitalSpring Established a Competitive Advantage to Grow Into One of the Restaurant Industry’s Most Unique Investors

In the private equity or credit universe, it takes sector specialization to stand out in a field crowded by generalist investors. For CapitalSpring, the key to a sustainable competitive advantage, however, was identifying opportunity in a long-standing industry that others had overlooked due to surface-level volatility.  The firm recognized the restaurant industry’s breadth and scale as well as the inherently necessary role it played in consumers’ daily lives. While restaurant trends might come and go, the industry itself serves a variety of ever-present consumer needs – nourishment, convenience, and social connection.

“At the beginning, we were put in touch with a top-notch operator who had the opportunity to acquire 15 locations he was running for a retiring owner. Problem was, he had no equity,” CapitalSpring Co-founder and Managing Partner Richard Fitzgerald said of the firm’s inspiration. “He just needed a creative capital partner to back him. That was the impetus for us.”

Fitzgerald explained that most private investment firms steer clear of restaurants. But when he took a step back and assessed the industry in 2005, he realized that despite its scale and visibility, there was no dedicated, institutional source of capital for branded chain restaurants aside from deposit-based banks, who are inherently conservative and rigid.

Realizing that an opportunity existed for an industry-dedicated and flexible investment firm, Fitzgerald and his co-founder raised $3 million from friends and family to launch CapitalSpring.

“Looking back, it’s been an incredible journey over these last 14 years. When we started CapitalSpring, it would have been hard to imagine reaching a scale where we have supported management teams across almost 200 investments and 60 restaurant brands.” Since its founding, CapitalSpring has grown to include 28 investment, operational, and administrative professionals and to manage approximately $1.4 billion of assets across several investment funds, targeting the restaurant industry.

Erik Herrmann, CapitalSpring’s Managing Director and the Head of the Restaurant Investment Group, echoed Fitzgerald’s sentiment, explaining that, “the number and breadth of management teams we have backed through the years has been tremendous.”

“The one common theme in our transactions has been a proven restaurant management team,” Herrmann said, noting the firm targets multi-unit franchisees, franchisors, and independent chains with a strong market presence that lack the right capital partner or structure to take their business to the next level.

A recent example of CapitalSpring’s investment approach in action comes via NORM’s Restaurants, a family-owned business that was experiencing some generational succession issues. CapitalSpring acquired the iconic 17-store brand near the end of 2014 and deployed a two-stage investment plan:  1) professionalize management and established a scalable operational foundation, which ended up doubling EBITDA, and 2) turn to unit growth, with 2 new locations now open and another 4 in the pipeline for the California diner chain.

“We live and breathe the restaurant industry,” Herrmann said. “Whether acquiring restaurant companies or providing structured financing, our industry context, broad experience, and operations capabilities help us identify challenges and opportunities that may not be evident to others. Every aspect of our business is geared toward building an industry knowledge or network advantage. That makes us different from banks, direct lenders and even other private equity firms.”

This specialization that CapitalSpring prides itself on is only amplified by the creativity with which it can invest. According to Fitzgerald, CapitalSpring was “implicitly built to be nimble.”

“Our sole focus on restaurants and restaurant-related businesses colors all that we do,” he said. “Equally important is the flexibility to invest across the capital structure and our ability to bob and weave depending on market situations. We really started driving structuring creativity back in 2010 and it has added a new dimension to our business.”

“We bring more to the table than our competitors because the structured capital solutions we’re crafting don't necessarily exist in the marketplace; they're often transaction-specific, designed to meet the needs of the management teams or partners we work with,” Herrmann added. “That versatility is core to our business.”

The company's differentiated approach doesn't stop there either. CapitalSpring purposefully ditches the sharp-elbowed nature of traditional private equity groups, instead establishing a reputation for being present, supportive and collaborative partners who do what they say.

“Most investment firms are transactional by nature—they do deals and then move on,” Herrmann said. “Because we live within the restaurant industry, we focus on relationships instead. We understand that a given investment may only run 3, 5 or even 7 years, but in many cases, those same groups will come back to us when a new opportunity emerges down the line. Repeat business and referrals are a significant driver of our transaction flow, which is highly unusual in the investment business.”

This focus on building and maintaining relationships underscores all of CapitalSpring’s work, even shaping how the firm engages with its portfolio.

“We've established and improved 4-wall systems, processes, and technology, opened many new stores, and supported numerous add-on acquisitions over the years, but most importantly, we’re always very careful to navigate the culture of the companies we work with,” Herrmann said. “We believe the best partnerships come from combining strategic capital with proven management teams and having shared goals. We try hard to be a capital partner of choice and to leave our portfolio companies more successful than when we first invested with them.”

Thanks to a wealth of experience and a unique investment approach, CapitalSpring consistently finds success for itself and its partners. With expertise and flexibility championing the company’s every move, CapitalSpring has its finger on the pulse of the restaurant industry and continues to prove its position as a leading restaurant investment firm.  While finding companies or brands with untapped potential isn’t an exact science, CapitalSpring continues to leverage its expertise and experience as it searches for its next opportunity.