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2019 could bring another PE frenzy


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Private equity was extremely active in 2018, shrinking the list of public brands on the Franchise Times watch list and moving a lot of money around in the franchise space.

In 2018, the list of publicly held franchised brands shrank by five as investment firms took them private. Bojangles, Jamba Juice, Jackson Hewitt, Sonic and Zoes were all taken private in PE transactions or by companies with a PE owner. And Qdoba was acquired from the Jack in the Box holdings. That’s just a sliver of the more than 5,000 private equity transactions reported by Prequin, a PE data firm.

A handful of companies  are likely targets for 2019 or beyond. Del Frisco’s announced it was looking at “strategic alternatives,” and rumor has it Papa John’s is in talks, too. What this watch list looks like in 2020 is anyone’s guess, but private equity is only getting more aggressive as it seeks to spend close to $2 trillion in unspent money or “dry powder.” In all, Prequin tallied $456 billion in transactions, so PE has to get much more aggressive in the coming years.

Why is it so hot? Because it’s working really well. In the past few years, the market has returned 4 percent to 6 percent, depending on the index you watch. With PE, on the other hand, returns can reach double digits for well-managed funds or the growing number of “mega funds” with more than $5 billion that can essentially buy whatever growth brand regardless of the valuation.

Those giant funds make up the bulk of growth in private equity and they’ve grown substantially, according to PE watchdog Pitchbook, which showed 13 funds crossed the $5 billion mark in 2018.

There’s also the ongoing trend toward specialization, especially in the restaurant industry where great assets are hard to find. According to McKinsey, when a private equity firm specializes it can position itself for serious operational improvement via experienced industry leaders within the firm.

Some very specialized firms are buying franchisee businesses, too. 2018 saw a handful of such deals, but watch for more PE owners at annual franchise conferences this year.

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