An interview with CapitalSpring’s Richard Fitzgerald


November 17, 2020

By: Sean Mooney

COVID-19 has fundamentally altered the way many businesses operate, and restaurants have been forced to make the most significant changes of all. Richard Fitzgerald is a co-founder and Managing Partner at CapitalSpring, a PE firm dedicated to the restaurant industry (companies in their portfolio include staples like Taco Bell and Dunkin’ Donuts), and he recently shared his insights about how his portfolio companies are responding to the pandemic and what his industry can teach us about navigating one of the biggest crises companies have faced in decades.

Sean Mooney: What do you see as the post-COVID future of the restaurant industry?  

Richard Fitzgerald: The National Restaurant Association recently reported that the restaurant industry has experienced 100,000 closures tied to the pandemic. Many of those are independent mom and pop businesses or concepts that come into the pandemic in a weak position. The industry has become crowded – growth in the number of restaurants has been outpacing growth in the population. In other words, supply has been exceeding demand, which could ultimately mean COVID-19 will be healthy for the industry because it corrects for the imbalance.

Post COVID-19, labor management will likely be easier, as higher unemployment will lead to easier hiring and lower turnover. It’s been hard for restaurants to grow in recent years, because rents have been high with fierce competition for good locations. More affordable locations will become available after the pandemic; meanwhile, a pivot toward delivery, drive-through, and off-premise services will take place. Fast casual restaurants (FCR) and quick service restaurants (QSR) will likely see continued growth, as they are best positioned for our “new normal.”

SM: What has CapitalSpring been focused on over the past six months?  

RF: Between March and June, we stopped looking at new deals and really focused on the portfolio. We talked to most of our companies every day for months. We didn’t know how long the headwinds would persist, so we wanted to fortify portfolio company balance sheets and ensure operations were as efficient as possible, and prepare for a severe and protracted downturn. We also worked closely with the portfolio to ensure off-premise capabilities were optimized, including creating temporary drive thrus and outside dining rooms with tents in parking lots and other stop-gap measures.

SM: What attributes do you look for in your companies’ leadership teams? 

RF: We’re always trying to find leaders who have solid track records of managing through certain environments and against specific goals. If we’re looking to back a company that will focus on acquisitions, we try to find someone who’s done that before. Matching up leaders’ experience and track record to the growth strategy of the business is a core priority for us.

Throughout COVID-19, we’ve had a lot of discussions with portco leaders about how they handled the economic crisis in 2008 and 2009, and the current crisis will help to inform relationships with portcos down the road. For example, we’ll be able to ask, “What did you do when you saw the news about restaurants being closed, people sheltering at home, and so on?” This is a new stress test against which we can evaluate people and companies. If managers did a good job through the pandemic, they’ve been battle-tested and will likely be reliable partners in future crises.

SM: How does CapitalSpring use third-party resources and expertise to fill gaps with their portfolio companies? 

RF: There are a lot of great resources out there that help improve decision-making around new site selection – for example, resources that can be used to identify the right location to build a new restaurant by leveraging AI to analyze large datasets of variables related to traffic patterns, site attributes, and local demographics. We also rely on third parties for supply chain and procurement analysis – everything from napkins and food to how restaurants can improve their facilities by reducing the cost of engineering and maintenance.

We work with a group that helps us look for efficiencies at the store level and optimize menus (there’s far more science behind this than most people realize). There are data analytics services that can tell restaurant owners how to implement a 3 percent price increase while minimizing reductions in foot traffic – for example, by changing prices on items that people purchase less frequently (think hash browns versus the Big Mac). We collect a lot of proprietary data with our portcos, but in some areas they don’t have the “depth of data” that third parties can provide.

SM: How has 2020 shifted your thinking about how you interact with portcos? 

RF: One major challenge is maintaining a healthy company culture while working remotely. I spend a lot of time just calling colleagues and checking in on them now. You don’t need to be as proactive about culture when people are seeing each other every day, but now it’s difficult to know who’s overwhelmed or who’s potentially dealing with stress at home.

SM: What is one myth about private equity you wish would go away for good? 

RF: There’s a pervasive idea that PE firms buy companies, strip them down, and try to sell them as quickly as possible to make a profit. In the vast majority of cases, this simply isn’t true – the industry often adds jobs, spearheads diversity initiatives, and brings focus on environmental, social, and governance (ESG) issues. PE firms also cultivate long-term relationships with their portcos – there are times when we’re lenders and times when we’re owners, but our role is always to put a company in the strongest possible position to succeed. That way, everyone wins.