The boardroom at Roark Capital Group’s offices in an Atlanta skyscraper has all the accoutrements of a nicely appointed meeting area, including a large conference table surrounded by comfortable chairs and a wide view of the city below.
There’s just one distinction: Two dozen black-framed notices of the private equity firm’s acquisitions dot the walls along the narrow sides of the room. Lying on the carpet are two more frames, holding announcements for the latest purchases, Carl’s Jr. and Hardee’s, made last December in a deal valued at about $1.7 billion.
“We’ve been so busy we just haven’t had the time to put these up yet,” says Neal Aronson, Roark’s founder and managing partner, smiling down at the frames.
The purchase of the burger chains’ parent, CKE Inc., which has nearly 3,450 units around the world, is Roark’s biggest deal yet, and it solidified the 13-year-old firm’s position as one of the world’s largest limited-service dining companies.
“They really know restaurants,” says Andy Puzder, chief executive of Carpinteria, California–based CKE. “They understand franchising, and they know brands and understand branding. They’re very entrepreneurial.”
Besides, he says, “they’re just plain good guys.”
All of those characteristics have helped turn Roark into one of the biggest influencers in the quick-service industry. It now owns three of the 25 biggest quick-service restaurant chains—it acquired a majority stake in Arby’s three years ago—and oversees a 16-brand dining empire with some $11 billion in systemwide sales and nearly 12,100 units employing some 300,000 people. Roark’s other limited-service brands include Auntie Anne’s, Carvel Ice Cream, Cinnabon, Moe’s Southwest Grill, and Schlotzsky’s—all of which are included under the Focus Brands umbrella—as well as Corner Bakery, McAlister’s Deli, and Wingstop. There’s also Green Burrito and Red Burrito, which cobrand with some Carl’s Jr. and Hardee’s, while Roark also franchises Seattle’s Best Coffee internationally. Its two full-service restaurant chains are Il Fornaio and Miller’s Ale House. Roark also owns nearly a dozen non-eatery franchise businesses.
The mid-sized private equity firm “has become a major player” in the restaurant industry, says Darren Tristano, vice president of Technomic Inc., a restaurant market research firm.
“These are very smart people,” he says. “They keep their companies autonomous, but they understand how to control costs and focus on getting the profit margins up.”
The firm has $3 billion in capital under management, raised through three successively larger private-equity funds. Some investors, including university endowments and investment managers, have invested in all three, a sign of Roark’s performance. The New Jersey State Investment Council, which manages investments in seven public pension funds, committed up to $100 million to the private equity firm’s latest fund in 2012 after the agency’s staff cited Roark’s “impressive track record” and strong returns.
Roark differs in many ways from other private equity companies. Some firms seek investments that fit into specific size parameters. Others acquire companies, do some financial engineering, and then flip them after a few years. In its 13 years in existence, Roark has sold only three companies. None were restaurants.
“We’re just not big believers in shortcuts,” Aronson says. “It takes time to build a really good company, to make it sustainable, and make the growth something that’s long term.”
This outlook helps makes Roark successful, says Lex Lane, Wingstop franchisee and vice president and business development officer at United Capital Business Lending in suburban Baltimore.
“They are an extremely knowledgeable group,” he says, noting that the firm’s buy-and-hold philosophy is important to him as a lender and franchisee. “The only way your investment is going to be rewarded in the long term is if you make long-term focused decisions that improve the business, which they do very well. They are like the Warren Buffett of restaurants.”
Roark’s strategy is to focus on a few industries and dive deeply into them, gaining knowledge and insight that is important to make acquisitions and providing expertise to its operating company managers, who typically hold an equity stake. The firm also provides the capital for operators to reach their goals.
Aronson began his career in investment banking and private equity in New York, working for several firms, including hedge fund Odyssey Partners. In 1995, he helped launch U.S. Franchise Systems, an Atlanta-based hotel franchisor that began with one brand and 22 hotels in nine states. When the company was sold in 2000, it had three brands and some 500 hotels in all 50 states and five countries.
“It’s pretty exciting to be part of helping people realize their dreams,” Aronson says of franchising. “If you work your tail off and follow the rules, you can be successful. … That is where this country has been built, because 65 percent of the job growth for 15 years leading up to the recession came from those people who built a store, then a second store, then a third.”
As chief financial officer at U.S. Franchise Systems, Aronson interacted regularly with two other executives, Steven Romaniello and Geoff Hill, who would later fill important operating and managing roles at Focus Brands and Roark.
After the hotel business was sold, one of Aronson's mentors, Odyssey Partners cofounder Jack Nash, encouraged him to try his hand at private equity.
“When I talked to Jack, he yelled at me and shamed me into starting Roark,” Aronson says. Nash had a tough exterior, but “he was honest and off-the-chart smart, so he gave you great advice.” He was also Roark’s biggest early investor. Aronson launched the firm in 2001 and named it for Howard Roark, the protagonist architect in Ayn Rand’s novel, The Fountainhead.
“He is my all-time favorite character in any book,” Aronson says. “He has conviction, passion, unbelievable honesty, openness, and he’s loyal and trustworthy. He refuses to follow fads, trends, or popularity. He follows what he believes.”
In the book, the character doesn’t bow to conventional wisdom and is seen as an authentic innovator. Howard Roark’s characteristics led to Roark Capital’s 12 core values, including commitment, integrity, collaboration, and accountability. Aronson says the firm talks about the core values and lives them out every day, and that they’re on laminated cards given to each of Roark’s 45 employees.
The firm’s first acquisition was Carvel in 2001 for $26 million. It met Roark’s expertise then: a franchised business in the hospitality arena. Romaniello became the operating partner, and Hill was added as vice president of franchising and foodservice.
They found a company in turmoil.
“The franchisees hated the company,” says Romaniello, now a Roark managing partner. Most of Carvel’s resources had been diverted to its supermarket business, which angered franchisees. There hadn’t been a new flavor in five years or a new product in eight. “I called Neal and said, ‘What have you gotten me into?’” Romaniello says.
The new managers set about turning that around by refurbishing the stores and giving franchisees the OK to sell a product they wanted: Italian ice. By the end of the first year under Roark leadership, 21 new menu items were added. Franchisees’ trust in the owners rose dramatically.
The following year, Focus Brands was formed to hold Roark’s foodservice acquisitions. Cinnabon and some franchising rights for Seattle’s Best Coffee were then acquired in 2004.
“In the early days, there were real synergies and reasons to put companies together in Focus,” says Hill, who became Cinnabon’s president. “There was talent at Carvel that Cinnabon could benefit from, and talent at Cinnabon that Carvel could use.”
Focus added Schlotzsky’s in 2006, Moe’s Southwest Grill in 2007, and Auntie Anne’s in 2010. The purchases were financed primarily through Roark’s first private equity fund.
Later acquisitions were made with capital from the second and third investment funds. Romaniello and Hill moved to Roark in 2008 to help with acquisitions and operations.
The deals became larger and more diverse—fast-casual, full-service, and quick-service restaurants, including some with company-owned units, not just franchisees.
“We have been slowly and methodically learning as much as we can about restaurants,” Romaniello says. “I’m not sure I’d call ourselves experts at this point, but we certainly have a lot of years of study, learning about the industry and through our experiences.”
The acquisitions are a team effort, Hill says, relying on Roark’s operational, financial, and other resources.
“We look first at the brand and the company,” he says. “What are the characteristics of that concept? How are the unit-level economics? That’s key. If it’s franchising, it better be great unit-level economics, or a franchisee would never get involved in it.”
Each deal brings its own set of challenges, says Erik Morris, a managing director who joined Roark in 2007 after leading investments in several quick-service restaurant companies at private equity firm Grotech Capital Group.
“They’re all different, and so I think we’ve gotten better at it,” he says. “We learn a lot from every company we evaluate, and then as we work with the companies.”
Making an acquisition is just “the ticket to play,” he adds. “We then focus our time on what are those three or four key strategic initiatives for that business.”
Nash, who died in 2008, passed on several lessons to Aronson, one of the biggest being that the best investments require great patience. At Roark, that patience is being tested with Arby’s. Roark bought control of Arby’s for $430 million in cash and debt, despite 2010 results that one analyst dubbed “amongst the worst in modern restaurant history.”
Romaniello and Hill say Arby’s had started to turn around when Roark made the acquisition, but Aronson is more blunt in his assessment of the company, which was part of the Wendy’s/Arby’s Group, led by investor Nelson Peltz’s Triarc Co.
“Arby’s was a mess—in menu, speed of service, cleanliness, physical box, focus, relationships, strategy, marketing,” he says, ticking off the woes. There were four CEOs in six years, a problem Aronson blames on previous ownership.
Still, Arby’s core attributes lined up for Roark, including the brand differentiation, great history, a large and loyal customer base, good locations, and upside potential.
“The things that were wrong we saw as fixable, as long as we had time,” Aronson says, noting that a private company has that luxury.
To help with Arby’s, two industry pros—Jon Luther, Dunkin’ Brands chairman, and former Yorkshire Global Restaurants CEO Sid Feltenstein—were added as independent directors on Arby’s board. Luther is Arby’s chairman.
So far, it seems the risk is paying off. Arby’s same-store sales rose 2.8 percent last year and have grown every quarter since Roark acquired the chain.
Few of Arby’s issues were present at CKE, which was acquired from private equity firm Apollo Global Management. It has strong unit-level growth and is stable, “with an excellent management team and differentiated brands,” Aronson says.
Although CKE has debt—the company refinanced $1 billion last year—Aronson says it’s very manageable.
“We want CKE to reach their potential,” just like all of Roark’s other brands, he says. If capital and expertise are needed to help the brands grow, “we’ll provide that.”
While the firm has not sold any of its restaurant companies yet, that time will come.
“As a private equity company, we will need to, and will” divest companies, Aronson says. “You’ll see us sell some companies over time, and you’ll see us take some companies public. That is part of our obligation to our investors.”
Roark “has plenty of capital” now for its companies’ needs and to make additional acquisitions, but Aronson can see a fourth private equity fund down the road.
“We don’t know when yet, but it will happen,” he says. “We’re growers, not cutters. We like growth, and we’re looking to invest in growth.”