Private Equity Becomes Adviser First During COVID-19
Because the goal of private equity is return on investment, it can get a reputation for being a legion of calculating bean counters. But as CaptialSpring Managing Director Jim Balis said, umbrella ownership groups should be just that, an umbrella to help investments weather storms like the COVID-19 pandemic.
“We jumped in very quickly with all our investments, and the first question was how can we support you and how can we help,” said Balis. CapitalSpring's portfolio includes more than 5,000 restaurants across dozens of brands, including Taco Bell and Wendy's.
He said like many operators, the companies in which Balis’ team had invested were having a tough time getting pandemic essentials like gloves and masks. But with a broad footprint and supply chain access, he said the company helped facilitate sharing a larger pool of resources.
That broad footprint also helped share knowledge about the effects of COVID-19 on the restaurant business. An operator in New Jersey, for example, will have a lot of experience to share with peers under the umbrella that hadn’t seen drastic effects.
“Because we see a lot over a broad variety of segments within our industry and a broad variety of best practices,” said Balis. “We brought experts within the leasing side, the insurance side of things to the table. We brought various lists of tactics about how to navigate plans when you’re closing restaurants and dealing with employees. It was a lot of what I would consider to be best practices that we’re fortunate to have exposure to.”
As CapitalSpring’s Chad Spaulding told Franchise Times, the depth of industry experience is what separates the company from other more generalist investors.
“If you are a PE fund, and you are a generalist, you have one product—equity—and you invest across many industries,” Spaulding, managing director and head of originations with CapitalSpring, told Franchise Times publisher Mary Jo Larson back in February. “We are the exact opposite: We are a product generalist and an industry specialist.”
That meant when the crisis hit, advice wasn’t broadly “clean more,” or “talk to your landlords,” it was specific to the restaurant space.
“Because we’re specific to the restaurant space, it’s down to the operational level. And it's detailed. It wasn’t just saying, ‘You need to sanitize every 30 minutes,’ but this is how you do it, then you put a piece of tape down and the employee signs it,” said Balis, pictured.
The huge influx of technology to help build out a new off-premises channel was another area where he said the company was able to help. Balis, who keeps close tabs on tech vendors in the space, was ready to help “steer” investments toward the right solution. In crisis mode, that’s especially important when timing matters and tinkering with the wrong solution could be deleterious.
“We knew which were best in class, these are better for quick serve and these for full serve, we can bring all that to the table whereas others who didn’t have that support might find it harder.”
He said the company is also rolling out employee temperature tracking and helping unit-level operators create “jump teams” that can come in and run a location if someone there becomes ill and or the staff is exposed to COVID-19.
Of course, Balis and team are looking to protect the investments and determine where new investment is necessary and what financial levers can help make sense of that while volumes are lower.
As CapitalSpring explores safety and peace-of-mind investments like touchless bathroom fixtures and toe kicks so customers can go hands free, Balis said he’s examining what the “new-normal” business model looks like as restaurants begin to reopen. More beverage sales are good, and lower paper and packaging costs are, too, but other costs haven’t changed.
“As you open up the stores, you’re picking up a little beverage and a little dine-in, but you have a set of fixed costs that haven’t changed like rent,” said Balis. “Even utilities; maybe you're using less utilities, but it’s hard to turn off AC in the dining room. So, you’re navigating these while opening the restaurant and the goal is obviously to minimize those.”
Landlord discussions is one option, he said, and potentially moving to percentage rent to manage through the fluctuations to come, abatements or deferrals are other options. Dialing back on some marketing campaigns could be another lever. Whatever works for the individual business to keep afloat and await the return of sales.
“It’s really dialing in on that breakeven point so at the very least you’re not burning though cash during the pandemic,” said Balis. “Then what’s the initial increase in sales to offset those costs. That varies by the margin you’re receiving. So understanding that and how you’re performing and what sort of runway you have, I think that’s really the best way to manage the business.”
He said a cashflow template is something they always utilize, but now it’s a matter of a closer look and more frequent comparisons. He said it’s been especially important now to look at the projection and compare it to results week to week so those projections get better as things improve and restaurants are able to get back to normal operations.