Return-Hungry Backers Of Roark Fund II Enjoy Feast

Roark Capital Group

Fund In Focus: Roark Capital Partners II LP

Fund Size and Vintage: $1 billion (2008)

Specialty: Mid-Market franchise companies, especially restaurants

Firm Founded: 2001 in Atlanta

Key Executives: Neal Aronson, founder and managing partner; Jeffrey Keenan, president

The private equity firm responsible for this intriguing combination is Roark Capital Group, an Atlanta-based mid-market private equity firm that specializes in buying and running franchise businesses, especially within the food and restaurant industry. The firm also makes control investments in such areas as environmental services and specialty retail.

Roark Capital bought Atkins Nutritionals in 2010, investing $116 million. Atkins Nutritionals is the purveyor of the eponymous low-carbohydrate diet invented by cardiologist Dr. Robert Atkins, who died in 2003. Ezra Field, a Roark Capital managing director, acknowledged the odd juxtaposition of its Atkins diet brand with restaurants like Cinnabon and Auntie Anne’s pretzels, telling the Wall Street Journal: “There are probably treats sold at some of our businesses that would not be optimal on the Atkins program.”

Nevertheless, Roark Capital’s investors have been well-rewarded. In December 2012, Atkins Nutritionals did a $58 million dividend recapitalization, returning half the firm’s original investment. EBITDA at company has already increased 32 percent in the year and a half since Roark Capital bought the firm from North Castle Partners, another private equity firm. Overall, Atkins Nutritionals has returned to Roark Capital’s investors a 61 percent gross IRR and a 1.6x gross return multiple, according to documents obtained by Buyouts. Roark Capital executives were not available for interviews for this article.

Atkins Nutritionals is just one of the investments in the firm’s second private equity fund, Roark Capital Partners II LP, a 2008-vintage fund that raised $1 billion. As of December 2011, Fund II had returned a respectable 24 percent net IRR and a 1.5x return multiple, according to the documents. Besides Atkins Nutritionals, Fund II’s investments include Wingstop Restaurants, Pet Valu, Auntie Anne’s Pretzels, Peachtree Business Products, Primrose Schools, Il Fornaio Italian Restaurants, Corner Bakery Café and Arby’s Restaurants.

Typically, the firm makes equity investments from $15 million to $350 million and the firm most often buys companies generating between $10 million and $100 million in EBITDA. The firm is also known to use less leverage, typically less than 2.5 times EBITDA.

Roark Capital was founded in 2001 by Managing Partner Neal Aronson, and over the course of the firm’s 11 year history, it has acquired more than two-dozen businesses and raised more than $1.5 billion in equity capital. Besides companies in Fund II, other name-brand portfolio companies include Carvel Ice Cream, Cinnabon and Schlotzky’s Deli.

The firm was named after Howard Roark, the iconoclastic architect protagonist in Ayn Rand’s novel, The Fountainhead. The firm says it wishes to emulate Roark’s example of rugged individualism as part of its investing strategy, and says it especially seeks to follow the character’s determination to be faithful to his own inspiration and not follow the latest fads.

Roark “had a vision …and he stuck to what he believed in, even when it went against conventional wisdom,” said Aronson in an interview with Bloomberg News. In the novel, Roark’s character was ultimately redeemed as a visionary, and his detractors were viewed as frauds.

Iconoclastic Deals

True to form, some investments in Fund II could be viewed as iconoclastic. The firm bought Arby’s, the struggling roast beef sandwich chain, in June 2011 from a holding company owned by Nelson Peltz, the billionaire investor. Roark Capital invested $130 million in the chain, and assumed $190 million in debt. The chain, with 3,600 restaurants in the United States and Canada, was combined with Wendy’s hamburgers after Peltz bought Wendy’s for $2.2 billion in 2008. That combination created the world’s third-largest restaurant chain.

For Peltz, the investment wasn’t working as well as planned, in part due to the financial crisis, which began just as his deal to buy Wendy’s closed. By selling off Arby’s to Roark Capital, Peltz was able to concentrate on revamping the far-bigger Wendy’s chain, which has more than 7,000 restaurants. It’s too early to say how Arby’s is doing under Roark Capital since it has only owned the restaurant chain one year.

Another Roark Capital deal that went against the grain was struck the very same day as Arby’s: its purchase of Il Fornaio Corp., the owner of the Corner Bakery Café and the Il Fornaio Italian restaurant chains, from Bruckmann Rosser Sherrill & Co., another private equity firm.

By buying companies such as Il Fornaio and Atkins Nutrtitionals from other private equity firms Roark Capital is betting that the opportunities for operational improvements haven’t already been tapped out by its previous private equity owners. The firm is wagering, in essence, that it will be able to take the company to the next level, and that the company’s previous owners, for whatever reason, have decided that they would rather sell and cash out.  

Most, but not all, of the firm’s restaurant brands have been gathered under Focus Brands, Roark Capital’s restaurant portfolio company. Being under one umbrella helps Focus Brands squeeze out efficiencies, said Steve Romaniello, Roark Capital’s managing director, in a interview with Buyouts in 2010. “When we go out to bid on cheese, we’ll look at Moe’s [Southwest Grill] and Schlotzky’s so they can buy together for better prices.”

To be sure, not all of Roark’s investments have worked out as planned. According to the Atlanta Journal Constitution, the firm had to write off an investment in Ace Mortgage just as the real estate bubble was reaching its pre-crisis peak. 

“We knew nothing about the mortgage business, and it didn’t work out,” said Aronson to the AJC. “We made a mistake, [and] we haven’t done anything like that since.”

And the firm faces its share of competition in the restaurant space. The Carlyle Group, Bain Capital and Thomas H. Lee Partners bought out and re-floated Dunkin’ Donuts.  Apollo Global Management bought the parent of Hardee’s and Carl’s Jr. Hamburgers. Golden Gate Capital owns California Pizza Kitchen and Oak Hill Capital Partners bought Dave & Busters. Recently, 3G Capital Partners just led an IPO for Burger King.

In the last few months, Roark Capital began to see how investors would weigh its opportunities and challenges, launching a third fund, Roark Capital Partners III LP, with a target of $1.25 billion. According to a recent filing with the Securities and Exchange Commission, the fund has already raised $462 million.

Investors in Fund III include the Colorado Fire & Police Pension Association, which committed $10 million, the Louisiana Teachers’ Retirement System, which pledged $50 million and the University of Michigan Endowment Fund, which committed $20 million. Investors in the firm’s prior funds include the New York State Common Retirement Fund, Princeton University and the Harvard Management Company.

The firm raised its first fund, Roark Capital Partners LP, in 2005, gathering $413 million in commitments, and followed that up in 2008 with Fund II, which closed with $1 billion in pledges.

In early 2008, after having just raised Fund II, Roark Capital’s managers believed that the prices of many potential purchases were too high and that credit spreads had become too tight. As a result, the firm kept most of Fund II on the sidelines, even before the world’s economy plunged into the financial crisis. As a result, Roark Capital only started earnestly investing Fund II’s dry powder in late 2009 and 2010.