Grotech Capital Group is looking to acquire as many as three restaurant companies to add to the one it already owns, underscoring the Timonium firm's plan to boost its involvement in atypical venture investments.
Frank A. Adams, Grotech's founder and general partner, declined to identify the companies but said all of them are "names you would recognize." He said that Grotech is in serious talks with one company. The company is "early in the process" and one of several possible suitors with the other two, he said.
Each buyout would be worth as much as $500 million, and Grotech is willing to do all three deals, he said.
"We would be buying the brand, and would be the franchisor," Adams said yesterday. He founded Grotech in 1984 and raised its first venture fund the following year. "These are all in the 'fast-casual' [market]," a step above fast food.
Direct buyouts of companies in such slower-growth sectors as restaurants is a big departure from more traditional venture capital financings, such as investments in high-tech startups. But the more predictable cash flows from such businesses can help smooth out the risk and uncertainty posed by investments in biotech or digital-technology companies.
While Grotech is chiefly a venture capital firm - it still has about $100 million to invest from the $400 million raised in its sixth venture fund - the company is no stranger to the restaurant industry. After purchasing A&W; Restaurants and Long John Silver's Restaurants in separate deals in the 1990s, Grotech and its partners engineered a growth plan that included "co-branding," operating two complementary restaurants out of one location to generate extra revenue while holding down costs.
In early 2002, the combined A&W;/Long John Silver's - as well as the co-branding concept - was sold to Tricon Global Restaurants for more than $300 million, giving the investors a reported 10-fold return on their initial investment.
Grotech returned to the restaurant business late last year when it and a partner acquired Captain D's, a regional seafood chain with more than 500 locations - including franchisee-owned stores - in a deal worth roughly $150 million. By applying the co-branding strategy to Captain D's, Grotech hopes to reprise its earlier success, Adams said.
The A&W;/Long John Silver's deal "was a home run for us," Adams said. Executed correctly, the co-branding strategy "is a case where two plus two can definitely equal five," he said.
When the co-location strategy works, the payoffs are strong. But it's not necessarily an easy plan to execute, said Richard Martin, managing editor of Nation's Restaurant News, a trade journal that covers the domestic restaurant business.
"There are a lot of moving parts" required to make the strategy work, Martin said.
However, Yum Brands - the Louisville, Ky.-based successor to Tricon Global and still owner of A&W; and Long John Silver's - has employed the two-restaurant/one-location strategy with great success, Martin said. Yum had more than 2,800 co-branded restaurants, both company-owned and franchised, in its system at midyear. Of that total, 296 were the combined A&W;/Long John Silver's concept that Grotech pioneered.
Venture capitalists, hedge funds and buyout firms have drifted into each other's areas of expertise in recent years, increasing competition for the best investments. Some have moved into unfamiliar arenas - too often with poor results, investment-sector experts say.
But Grotech still has the management talent needed to succeed in the restaurant business, said Stanard "Stan" Klinefelter, a Grotech fund investor who is co-director of private equity investments for Brown Advisory, a Baltimore investment firm.
Capitalizing on such abilities is "something [investors] should expect" from a venture capital firm, hedge fund or buyout specialist, he said. "I think it's a very good strategy."