Restaurant Investing

Three decades back, I was a brand new commercial lender at a community bank, eager and still sporting a full head of hair.  Our bank’s best restaurant niche was McDonald’s franchisees, who were paying four times cash flow to purchase restaurants; our bank was lending with SBA guarantees at Prime plus two.  Forgive me if that seems like the good old days.

Eventually I ran that community bank for five years, then founded an equity fund, SB Partners.  We were open to investing equity in small restaurant deals before that was a common approach for private equity.  Our best investments included a Taco Bell franchise which started small in Atlanta and Savannah and eventually built to forty units in those locales and in Orlando.  We also had a brief but lucrative run as the second largest investor in the McAlister’s franchisor before that business was sold to another, larger equity fund.

What did we learn? Our three most compelling lessons: 1) Partner with an outstanding operator, and remove as much of the G&A nonsense as possible from their plate, so the operator can focus on running great restaurants.  2) Outsourcing is essential, particularly for accounting, HR, and new store development.  3) Purchase price isn’t everything, but it is a key piece.  If the price is fair going in, then there’s free cash flow to remodel restaurants and run them right.  Overleveraged, which fortunately we never were but often observed in our colleagues, one has to rob Peter to pay Paul, and while that can continue for quite a while, it is not much fun for anyone involved.

We remain excited about purchasing multiunit operations.  But I expect that the best opportunities will be to find one or two unit operators with compelling concepts, who want to continue running their stores, and partner with someone else to grow the concept outside their geographic footprint.  Such expansion is hard and risky.  It requires someone with equity, access to experienced multiunit operators, and the general business expertise to put the pieces together.

If you think we might be the best fit for your opportunity, please call, text, or email.


PitchBook lists SB Partners as Highest Performing First Time Fund of 2000!

This is taken from the PitchBook Blog.  SB Partners was a 2000 fund.

Private Equity and Venture Capital Data, Analysis and Insights

Rookies of the Year: Top first-time fund managers since 2000

Alex Lykken / May 21, 2015

First-time fund managers in the PE and VC industries often have a difficult time raising their debut funds, not to mention outperforming their peers once their funds close. Blackstone’s Steve Schwarzman publicly cautioned budding PE fund managers earlier this year, and the risks are similar in the VC world. Why risk ruining your career trying to make it in the crowded PE and VC markets?

Well, in many cases, those first-time managers actually do pretty well. The table below includes the top-performing debuts for PE, VC and funds-of-funds by vintage, and includes quite a few now-familiar names. Easily the highest IRR recorded by any firm post-2000 goes to Union Square’s first fund, which has brought in 67% since debuting in 2005.



Why Leucadia…

While we prefer private company investments, any such investment is compared to our best opportunity among publicly traded stocks.  Who might that be, in this pricey market?  Leucadia National.

Overview:  Leucadia is a conglomerate, built over decades by Joe Steinberg and Ian Cumming, who retired in 2012 by merging Leucadia with an investment bank called Jeffries.  Joe & Ian believed that the executives at Jeffries–Rich Handler and Brian Friedman–would be effective stewards of their legacy.

Leucadia’s largest business is Jefferies.  They also own an asset management company; a large loan servicing operation (called Berkadia, a partnership with Berkshire Hathway); the country’s third largest beef processing operation; real estate; car dealerships; even a cable operator in Italy.  Leucadia currently is investing aggressively in oil & gas, particularly in the Bakken.

Valuation:  Leucadia is reasonably priced.  Book value is $10 billion, just under $28 per share.   The stock price has been at or below book value for the past year, and as of early October, is selling under $23.

Earnings:  Earnings have averaged $3 per share for the last five years and tend to be lumpy, as Leucadia harvests an investment.  Not all of Leucadia’s businesses are attractive ones—the beef and lumber operations are very commodity price dependent.  But, in total, the economics of these businesses should enable a 10%+ return on equity over time.

Alignment of Interests:  Joe & Ian, who built the company, own just over 10% of the stock.  Rich & Brian, and their families, own another 3.5% (their shares worth about $300 million.)   To us, that’s a huge plus…alignment of interest between owners and managers.

Risks – Brokerage:  While Leucadia often is called the baby Berkshire, their business model has greater risk than Berkshire’s.  Berkshire is an insurance company, meaning it holds cash from policies, awaiting claims, and uses that cash to invest in businesses.  Here the core business is a broker, meaning they need financing for their inventory of marketable securities.  Jefferies is well run, but as 2008-09 showed, if the economy gets bad enough, it can be difficult to finance an inventory of even high quality securities.

Risks – Lack of Focus:  The conglomerate model goes in and of fashion.  Part of the legitimate concern is that Leucadia invests in many different types of businesses…do they really understand all of them?

Risks – Timing:  Leucadia has made numerous investments in the last eighteen months.  Perhaps they have been able to find pricing of investments more attractive than the norm, perhaps not.

Conclusion:  On balance, a superior risk return relationship than with most other publicly traded marketable securities, including a number we continue to own.  Buying at prices around book value likely will lead to 10%+ returns over a ten year holding period.  We own Leucadia and continue to accumulate.  A caution: no idea on the short term (two to three year) likely change in Leucadia’s stock price, only a conviction that over a long term, its businesses will prosper and the stock price will, eventually and imperfectly, mirror that prosperity.