The restaurant-industry investment fund hangs its hat on flexibility and focus
CapitalSpring was founded in 2005 with the explicit intention of helping foodservice franchisees secure financing. In the years since, the investment fund has broadened its scope to include corporate-owned businesses, but it is still focused squarely on the restaurant industry. That narrow focus has made CapitalSpring an authority in the industry, having secured more than $1 billion in financing for more than 50 brands from its three offices in Los Angeles, Nashville and New York City.
We talked to Erik Herrmann, Managing Director and Head of Restaurant Investment Group for CapitalSpring, to learn how the company approaches the franchise finance landscape. Herrmann says the key to CapitalSpring’s success is a unique combination of flexibility and focus.
In a nutshell, what does CapitalSpring do?
Herrmann: We are a restaurant-focused investment fund. The vast majority of our activity falls into one of three buckets. The first is larger franchisee businesses operating within national or regional franchise systems. The second bucket is franchisors, and the third is corporate-owned restaurant chains.
Ancillary to all of that, we are increasingly looking at opportunities with vendors, suppliers, realtors and other businesses that work in and around the restaurant space. But the vast majority of our investing in restaurant businesses.
How does CapitalSpring help franchisees secure financing?
Herrmann: We work with franchisees in a number of different ways. If you think about the traditional capital options available, you have banks that provide debt financing and, increasingly, private equity funds, which typically invest in larger franchisee business.
Our business is a little unique. We don’t just focus on debt or equity. We have the versatility to invest across the entire equity structure. What we find is that people work with us because they are looking for an alternative to a traditional lender. Traditional lenders are often more restrictive in what and how they can lend, but we tend to be more flexible. We are a much more customized investor compared to there lenders who sell a pre-baked product.
Are there certain types of financing packages that CapitalSpring looks for?
Herrmann: In terms of size, we are typically looking to invest $10–100 million per transaction. And we’re looking across the entire restaurant landscape — fast casual, QSR, full-service — really everything in the industry, so it’s a pretty broad scope in that respect.
Does CapitalSpring work directly with franchisors?
Herrmann: We do. Historically, we’ve focused more on multi-unit restaurant franchisees, but we have made a couple of franchisor-level investments as well, and we evaluate those as the opportunities present themselves. For instance, we’ve helped finance both Beef ‘O’ Brady’s and The Brass Tap at the franchisor level.
What do you look for when vetting franchise investors?
Herrmann: There are a number of factors we look at. Most important is the caliber and experience of the team we’re partnering with. We want to be sure that, whatever their plan is, whether it’s new-unit development or acquiring a block of restaurants, they have the experience required so that they aren’t learning how to do it on our investment.
We are also very focused on unit economics. But in general, we’re not so much in the business of picking brands that we want to be in. Instead, we’re more interested in finding a great team that has found a unique opportunity. As long as the brand they’ve chosen has proven viable, we will create a financing package so they can execute on that plan.
What you often find with a lot of the more conventional lenders in the market is that most of them kind of live and die by brand lists. So bigger banks may only be able to lend into five or 10 brands depending on their screening protocols. If you are a franchisee operating in a system that’s not on that list, you may have challenges accessing the capital you need. We come at it differently. We are looking for at the story behind the brand — it’s situational. We have invested heavily in McAlister’s Deli, for instance, which today is a big brand, but when we started working with them in 2011, it wasn’t on anyone’s list, and it was hard for franchisees in that system to find capital, but we saw a viable brand that knew what it was doing.
What advantages over other financing options does CapitalSpring bring to the table?
Herrmann: It boils down to two things. The first is flexibility. We can be a conventional lender, a minority partner, and a control investor. We can be all of those things or mix and match components depending on the needs of the partnership. So rather than looking at the products available on the market and telling a franchisee what we can and can’t finance, we can talk to them, find out what their goals are, and develop a package that works.
The second thing is our focus. We invest only in the restaurant space. We’ve invested in 50 different brands and thousands of restaurants over the past 13 years. So we know the space. We’ve seen every angle of it. We have encountered all of the challenges that our franchisee partners are likely to face. We have a strategic perspective that other lenders don’t have. Compare that to a conventional lender operating across multiple industries, and it’s just a completely different level of engagement.
Have you noticed any changes in the way franchises and franchisees are going about financing?
Herrmann: The major trend in the industry in recent years has been consolidation. You are seeing larger companies and a larger variety of companies out there, which is leading to a broader range of lending options. Private equity and family offices are a much larger force in the space than they used to be.
The capital market always ebbs and flows, so of course we’re still seeing that. There’s plenty of access to capital right now, and we’re in a rising-rate environment, which will likely start to put some pressure on franchisees, especially if they have meaningful capital expenditures like remodels on the books. We can be a great solution for that because, on the lending side of the business, we can structure much more flexible loans that can help free up cash flow for expenditures