SAN FRANCISCO—Private equity firms are flush with cash and challenging historical wisdom in the investment process. With traditional methods unattractive and numerous national chains popping up, the growing interest in restaurants and retailers among private equity firms is a common investing theme.
Tom Mullaney, founding partner with lease and debt restructuring firm Huntley, Mullaney, Spargo & Sullivan Inc. tells GlobeSt.com: “There is a lot of money looking for homes. Distressed debt firms are changing their charters and increasingly investing in restaurants and retailers.”
Moreover, private equity firms are finding that preplanning before a possible acquisition can have a significant, positive impact on the bottom line. Due diligence can ensure a purchase price is justified in terms of industry standards or reveal hidden value that can increase a bid for an asset. When deciding whether to invest, astute firms are drilling into real estate leases, says Mullaney.
“The smart firms are doing advance digging. Part of that preplanning includes tearing apart the locations and costs of remodeling required,” he says. “They are beginning to place a heightened emphasis on the lease cost, lease term and remodel status of the assets they are acquiring. With lease obligations typically being the largest 'off balance sheet' liability and in many cases in an amount even greater than loan liabilities, it's important to get it right. The biggest concern for private equity firms is overpaying for an acquisition. The lesson is to know what you're buying and don't overpay for it.”
What is unknown is whether interest rates will increase. This could have an effect on retail and restaurant private equity investments in terms of cash flow, values and exit strategy. If a firm bought at top dollar and then interest rates increase, investors would be hard pressed to pass along those price increases to retail or restaurant consumers. At the same time, a profitable exit would also be negatively affected, says Mullaney.
Beyond the present climate and unknown factors, the best future opportunities for private equity firms to optimize real estate leases are likely more centrally located rather than coastal locales. The key is finding opportunities in middle America that have yet to be uncovered, Mullaney advises.
“To quote baseball great, Willie Keeler: 'hit 'em where they ain't.' And, the bottom line for the bottom line is you should have a good sense of what is properly valued and what needs restructuring,” Mullaney says. “Triage portfolios: Do you fix it, sell it, exit or extend? Develop attack plans for each category.”
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Lisa Brown
Lisa Brown is an editor for the south and west regions of GlobeSt.com. She has 25-plus years of real estate experience, with a regional PR role at Grubb & Ellis and a national communications position at MMI. Brown also spent 10 years as executive director at NAIOP San Francisco Bay Area chapter, where she led the organization to achieving its first national award honors and recognition on Capitol Hill. She has written extensively on commercial real estate topics and edited numerous pieces on the subject.
