The restaurant sector was one of the hardest hit during the pandemic, but the industry is rebounding rapidly, as consumers embrace going out again. Mercato Partners is jumping at the opportunity. The private equity fund, headquartered in Cottonwood Heights, Utah, near Salt Lake City, raised $100 million for its Savory Fund in October 2020, and followed up by closing Savory Fund II at $100 million in June 2021. The goal of the second fund is to build a portfolio of six or seven small, but fast-growing restaurant brands that can expand from just a small number of local stores to larger regional chains. Savory portfolio companies include Via 313, Crack Shack and Swig. Mergers & Acquisitions recently caught up with Mercato managing director Andrew Smith to discuss how the pent-up demand for dining out is translating into PE deals. Smith and his wife Shauna Smith previously co-founded Four Foods Group, a company that built and operated 170 restaurants across the U.S. Today, Shauna Smith serves as CEO of Savory Management Group.
Why is this a good time to raise a restaurant fund?
As the country begins to re-open, people will be looking to eat more outside the home and try new concepts. We see this as a huge opportunity for anyone looking to invest in this industry. There will always be opportunity when disruption in your industry takes place. This was one of the most catastrophic events this industry has ever experienced. But that still creates new opportunity, and we see that as the perfect time to invest into this industry to help it rebuild.
We were fortunate to be able to deploy our first fund fairly quickly pre- and during Covid. By the time we went back to investors to market the second fund, the demand was exceptional and oversubscribed. We raised Fund II within 4 months, when the first fund took 2 years to the day. The second fund will invest in new concepts, while the remainder of the first fund has been set aside for further growth of our existing portfolio of brands throughout the U.S.
What are the opportunities?
The pandemic didn’t make people Betty Crocker overnight, so they want to get back to eating great food again. This pent- up demand for experiences with family, friends and business co-workers is going to create the “golden age” of sorts for the restaurant industry for at least the foreseeable future. There was a point in 2016-2019 that the industry was becoming oversaturated. Now that is not the case. There is white space for many brands to spread their wings. Especially new, exciting brands with new flavor profiles and experiences that are unmatched.
Some of the opportunities we forecast will be game changers for the future are the widespread adoption of third-party delivery companies, touchless technologies, digital pick up options at the store front, and new food options through ghost kitchens. All of them are here to stay. So we are going to be monitoring them all to see which one continues to be a stronghold within the industry.
What types of businesses is the fund seeking?
We specialize in working with founders with exciting, profitable and experiential concepts looking to grow outside their home turf. Usually they have a handful of locations, but would like to grow into a national footprint. That is our target sweet spot. This is where the 60+ veteran team members of Savory Management can get involved and influence the brand’s replication strategy the most.
Our initial check size is in the $5 million to $10 million range, and we reserve the same amount for follow-on capital on each portfolio brand. Our investors also have co-investment rights if they’d like to increase their allocation to a specific brand, should that opportunity present itself.
How many investments will the fund make in 2021?
We plan to invest into 2-3 new brands out of Fund II by the end of 2021. We also plan on opening over 40 locations and investing nearly $23 million in development and growth initiatives within Fund I portfolio companies within that same timeframe.
How is Savory promoting diversity, equity and inclusion?
Savory is at the crossroads of society when it comes to DEI. This industry is one of the most naturally diverse industries in the world, and that is why we enjoy it so much. It is worth noting that we were founded by a woman – Shauna Smith – and she is currently the CEO of our value-add management company, Savory Management.
We have a 55 percent/45 percent female/male workforce in our corporate office, with half of the executive suite female, and with people of color in many of those high ranking positions. We have always believed that the “right” person for the job is who should be in the position, not based on gender or ethnicity. Because of that, we look at skills and experience every time, and nothing else. Because of that, compensation, benefits and equity do not differ either. They are the same for all ranking positions in the company, from corporate on down to each of the stores we own in each market.
We hire from within the company first, always. Because we believe in this form of career mapping with our employees, we also have a highly inclusive culture where we provide opportunities to all, never based on gender or race.
We have also made investments into diverse-owned companies, with diverse types of founders with diverse backgrounds. It is what makes Savory unique – the large swath of society that we employ and serve on a daily basis. We are passionate about it.
How is the firm handling labor shortages?
Labor has been a short-term hurdle. We always have a long-term view, so we have been rolling with it just like most are – paying a bit more and struggling to find talent that want to work. Like many consumer-facing businesses, extended unemployment benefits have been a headwind for us. However, we feel that great employees are still looking for companies that have momentum. When we create additional momentum through growth, our brands become more desirable to work for. Long term, we feel comfortable to continue to make investments just like before.