Roark places bets on franchised brands

Money invested by private equity firms has dropped dramatically

At a time when many investors are holding tight to their cash, Roark Capital Group could invest more money this year than in its previous eight years with new deals expected to be reached within the next two months.

The Atlanta-based private equity firm already has invested in 14 franchised or multi-unit companies that combined have more than $3 billion in annual systemwide sales. Its companies include Moe’s Southwest Grill, McAlister’s Deli, Cinnabon, FastSigns, Primrose Schools and Batteries Plus.

Roark said it’s in active discussions with several companies that should lead to new investments soon. Roark expects to add to its portfolio this year with equity investments that could total $200 million to $250 million, executives said in a recent interview at their Midtown offices.

These investments mean the Atlanta-based firm could have even more ties to up-and-coming franchised businesses. They also reflect a belief by Roark that the economy has bottomed out.

“We have been concerned and bearish about the economy and the debt markets for about 18 months now,” said Neal Aronson, Roark founder and managing partner. “We have been cautious and haven’t invested our capital. Now, we feel like we’re ready to start investing again.”

Along with the rest of the U.S. economy, the private equity business has been operating in an uncertain environment for more than a year. Private equity firms, such as Roark, use money from investors to buy all or part of businesses.

They typically make money by reselling these businesses or turning them into publicly traded companies with a stock offering.

The private equity world was booming just a few years ago. U.S. private equity firms invested $537 billion in 2007, according to PitchBook Data, a New York-based firm that tracks the industry. But through the first six months of this year, the amount invested has reached just $26 billion.

Activity stalled as the recession began and the banking crisis unfolded, said Adley Bowden, Pitchbook Data managing editor. To buy companies, private equity firms pair their money with loans from banks and other financial institutions.

That money has dried up, Bowden said.

Private equity firms and the businesses they’re trying to buy are having a more difficult time coming to terms on a deal, he said. It’s hard to value businesses in this environment, and with limited access to borrowed money, the private equity firms have less money for bids.

“A lot of them are looking at deals,” Bowden said. “But they just haven’t been able to close that seller-buyer gap yet.”

For Roark, the economic downturn began as it closed on its second fund. Aronson formed Roark eight years ago after selling U.S. Franchise Systems, a hotel franchisor that included Microtel Inns & Suites, Hawthorn Suites and Best Inns & Suites.

Roark invested about $150 million before raising money for a $413 million fund in 2005. Among its early deals, it bought Carvel, Money Mailer, FastSigns, Seattle’s Best International and Cinnabon.

Roark closed last year on a second fund that totaled $1 billion. Its acquisitions through the second fund include Acworth-based Primrose Schools and Atlanta-based Simply Floored. It also expects to close soon on a deal to buy Pet Valu, a Canada-based chain of pet food and supplies stores.

These deals, though, are just the beginning. So far, Roark has invested $70 million of the second fund, Aronson said. The investment firm could add a dozen companies to its portfolio in the next five years, he said.

“We have a couple of businesses that we’re working on right now that we hope in the next 60 days will come to fruition,” he said. “And our pipeline behind that continues to grow.”

Despite the banking crisis, Roark is well-positioned because it relies less on borrowed money than most private equity firms, Aronson said. Roark’s deals on average involve about 60 percent of its equity and 40 percent debt. Most private equity firms use debt for well over half of the purchase.

Roark also follows a long-term strategy, Aronson said. It’s only sold two companies, Pike Nurseries and U.S. Arbitrage Finance, and has no plans to sell more in the near-term, he said.

As it considers acquisitions, Roark executives said they plan to build on their expertise in franchised companies. Late last year, Roark added Steve Romaniello as a managing director.

Romaniello previously was CEO of Focus Brands, which runs five Roark-owned restaurant brands. Geoff Hill, who has been president of Cinnabon, also is transitioning to Roark as a vice president.

The timing is right for investments in more franchised businesses, Romaniello said. Many owners are looking for investment partners that can give provide the capital and experience to distance themselves from competitors, he said.

So far, Roark has focused on investing in franchisors, the companies that own the brands, but it’s also looking at franchisee groups, companies that buy the rights to operate restaurants under the brand, Romaniello said.

“We’re in active discussions right now with a number of companies like that where we could work on the other side of the equation,” he said. “I think more than anything it demonstrates our belief in the model of franchising.”