Ex-Goldman Duo Seek Out Recession Busting Franchise Operators
Hi, it’s Emma Sanchez in New York. I spoke to a former Goldman Sachs partner-turned private equity founder with an eye on franchisees. Also, SpaceX weighs a spin-off of Starlink and Wells Fargo trims the fat.
Franchise frenzy
Two former Goldman Sachs partners are betting they can outsmart any US recession by backing smaller business owners with the rights to sell some big-name brands.
Michael Esposito and Scott Romanoff launched Franchise Equity Partners (the clue’s in the name) two years ago with backing from HPS Investment Partners and a plan to invest $1 billion over 18-to-36 months in as many as 20 businesses.
So far, in what's been a challenging period for any kind of private equity investing, it’s managed to deploy about $400 million and intends to spend the rest in the next 18 months. FEP is being selective in its search for new partnerships, which has extended its timeline, according to Esposito.
“The more we get into it, the more we’ve been surprised at how broad franchising is in our economy,” he said. “Every day, we find a new sector.”
FEP makes minority investments in franchisees running everything from restaurants to car dealerships. It aims to partner with consumeroriented brands at mass market price points, such as Taco Bell and Planet Fitness. Such “recession resistant” names have loyal bases, said Esposito, and other consumers will also be happy to turn to them from more expensive alternatives when belts need tightening—like now.
“I think as the economy has slowed down, the consumer certainly appears more pinched,” Esposito said. “Fortunately, in the brands we're in, particularly like a Taco Bell, it's much more resilient. People kind of trade down to a Taco Bell.”
FEP’s investments include Neighborly franchise operator Rapp Operations and a stake in Pacific Bells, a large Taco Bell franchisee. It has plans to allocate money to heavy equipment dealerships over the next six to nine months as part efforts to diversify its portfolio.
“They all are affiliated with these iconic brands,” Esposito said of the companies that FEP backs. “They have high cash-on-cash returns, so they tend not to be high growers, but they’ve got really good cash flow characteristics.”
Esposito acknowledges that his firm is operating in a market that’s typically been skeptical of private capital, with companies not keen on the idea of PE owners that want to pile debt onto a business and then flip it after five years.
“We typically are passive so that the owner, the family, remains in control of all the day-to-day decisions,” Esposito said. “So unlike private equity, we can't force the business to be sold in five years time, or any time, and we can't force the management team to buy back our stake.”
—Emma Sanchez
