INSIGHTS: Food for Thought: a Q&A with Savory Fund

[Bobby] Hi, everyone. I'm Bobby Wood, founder of BridgeWood Alternatives, a Hong Kong-based alternative investment placement firm. As many of you have heard me say, we feel that one of our strongest value propositions to investors is our global placement partner platform, where we partner with like-minded groups around the world, sharing our respective best ideas to provide a suite of unique high-quality alpha generating opportunities across asset classes, geographies, and strategies.

Today, I'm here with Andrew Smith, founder of Savoy Fund, which definitely checks all those unique, high-quality, alpha generating boxes. I was introduced to Savory by one of our platform partners who have been working closely with them for years. Initially, while I thought Savoy's FMB focused buyout strategy seemed conceptually interesting, I did have a few major questions that almost caused me to pass on diving deeper. Luckily, I did dive deeper, and as I learned more, not only did I get my initial questions answered, but the story became more and more fascinating and incredibly compelling.

But as I started speaking to investors and sharing the story, I noticed that many of these investors initially had a lot of the same questions that I did, so I thought it'd be helpful to do a Q&A with Andrew to address some of these points and ensure others don't overlook or dismiss this like I almost did, given the same preconceived fallacies and misunderstandings that I initially had.

So Andrew, thanks very much for  taking the time to speak with me today and, and going through these questions.

[Andrew] I'm honored to be here and I'm excited about the questions.

[Bobby]  Great. Well, let's just dig in, to use a bad food pun then. You focus on the F&B industry, which some see as a niche within a niche, as they say, maybe a sub-sector within the consumer sector. So what do you say to investors that are looking for lower middle market buyout opportunities, but whose initial reaction is, , this is too niche or too focused?

[Andrew] Yeah, first of all, I would say I understand the question. I would look at it the same way if I wasn't in the industry like I have been for the last 17 years. And if you look at this industry, it is a tremendously large industry. It's one of the largest TAMs in the world. If you look at the TAMs that are the larger than food and beverage, it's just medical and big pharma. So you think about the sheer size of this town and this industry, then you look at the different buckets that this industry is broken up into.

You have the venture stage where people are coming up with new ideas and new menus and new concepts that they're launching within their neighborhood and to share with their friends, and, and that is a large section of the of the the TAM. However, there's a gigantic part of the TAM and that are people that have created something, they've got 5 to 15 units, and they just don't know how to grow beyond that. But they've been around for 10-15, 20 years. And then you have the large multi-unit national and international players such as a McDonald's.

If you think about the one that we focus on, is it a niche within a niche? Yes, but that niche is probably a half a trillion dollar opportunity that we're focused on.

So is it too much of a niche within a niche, I would say it is, but it's a large TAM that we're targeting, and that's where I think a lot of the opportunity for us is because there's so much perpetual and persistent opportunity for a firm like us.

[Bobby]  The next is pretty timely given that everything that's going on in the world today. Being directly tied to the consumer sector, , the question of “how will this do in a recession” usually comes up. You've been in the industry through multiple market cycles and a few recessions now, and most recently through COVID, so can you share your thoughts on how recession affects the F&B sector, and how you personally navigated these more trying times.

[Andrew] It's a great question because I actually entered this market during one of the greatest recessions ever. We actually got into it during the GFC here in the United States, and I had been in the tech industry 11 years prior, so I actually lived the dotcom bubble too. So I know big cataclysmic crashes, and I know what a recession feels like as a business owner.

And especially within this industry, I came in with eyes wide open, seeing the effects of what a recession does to this industry as compared to other industries that I had been in and others that I had invested into. And that is that this is a non-correlated market.

We see with the dotcom bubble, especially if you're in tech, if the market crashes, you crash with it, and during the GFC my tech business crashed with the GFC as well. But when we entered this industry in the middle of recession, the thing that people will do on a daily basis, whether the market's down 1000 points or up 1000 points, or there's a new war, is eat. People have to eat 2 to 3 times a day, and what you see is during recessions, more people will actually cut things out of their daily spend or actually yearly spend like a vacation, but they will still spend their money on the things that are the, the  guilty pleasures, if you will, and that is to go out to eat.

Does that mean that the high high end, which is fine dining, will perform as well as maybe casual and fast casual and QSR? No. Those are the segments that we focus on because of that reason. Recessions hit the higher end, white tablecloth type of dining establishments the most, and that's where I think the fallacy that people say, well, it gets hammered. Well, it probably hammers where people are probably not going as often. QSR, which is quicker, fast casual, and then casual dining, where your price point per person is about $30 to $35 and that's where we focus Savory because it's the safest for our LPs.

[Bobby]  Ok, but even if they're going to the restaurants and purchasing beverages, another common opinion about restaurants or F&B in general is that competition's high. The failure rates even higher, and the only thing that's low is the margins. You probably heard this once or twice. What's your response to that?

[Andrew] Well, it's a funny question that I get asked by a lot of my ex-tech friends. They would always say, Andrew, you're in food and beverage, can you make profit? And in my mind I'm like, well, you're in tech, you've never made profit in your life, because I never did either.

In our industry, it's actually the opposite. We focus on brands that have a range of between 17% and 30% cash kicking out of those establishments on a yearly basis, and cash on cash returns of between 2 and 3 years. They're incredibly profitable. If you pick the right brands, the ones that are actually emerging elite brands that are ready for scale like we focus on, they are unbelievably cash flow positive.

So really if you look at the uncorrelated nature, the cash on cash returns, and how cost effective it can be to invest into a growth project like this. It's actually the opposite of what people think. The fallacy is that you can't make money and that that failure rates high.

If you look at any of the studies that look at just small businesses across America, restaurants actually stay alive more often than most small businesses in their first year within 5 years and after 7 years. It actually beats most SMBs. They have more staying power and they're more sticky in the economy than anybody understands.

[Bobby]  You used the phrase emerging restaurants, but as you mentioned, these are cash flow generating restaurants, positive EBITDA, etc. You take majority stakes in all of these brands that you invest in. So if these restaurants are are rocking, why would they sell 51% or more to you?

[Andrew]  Yeah, there's a couple different reasons and, and because I'm a founder and I've been in the position, a lot of these founders have been in where I've taken on private equity capital or partners, you do it for various reasons, but within the food and beverage industry, when we roll up to some of these brands, they're looking for a partner already. We're not typically talking to a founder that that is fine, they're living their best life and it's a lifestyle brand.

We're talking to founders that are looking to build a legacy brand, and a legacy brand is beyond their skill set. What got them to where they're at in the life cycle of growing their brand, they, they had that skill set, curating the menu, coming up with a concept, giving that environment to their guests, and then scaling it from 1 to call it 10 units. They were excellent at that. They're making money. It's a cash flowing asset and it's growing in sales every year.

But the problem is they know that to go to another state or another region or to hire, not 200 people or 300 people, but 2000 people over the next several years, that new cycle is one that they're just uncomfortable with, they don't understand and they don't have the playbook for that. So when we come into the to the scene, they're looking for a partner, and when they see someone like Savory that has not only the experience, the playbook and the team, but also the capital. They see us as the full solution under one roof. We're not just the capital, but we actually have the playbook of knowing how to get them from 10 to 50 or 60 or 70 to where real true enterprise value is for their now legacy brand.

[Bobby]  All the questions so far have been specifically focused on the F&B industry, but I want to turn my last question today to what's probably the most common question, or frustration, that investors have with PE in general right now, and that's exits. Tell me about your exit strategy and potential exit partners.

[Andrew]  I'm an LP as well, so I understand the frustration for most LPs as we're looking at the landscape of different opportunities to invest. I think that everything is a little bit stuck right now and I think that everybody has heard the terminology of the new IRR is DPI, and I think that I know that personally as a GP now as a custodian of their capital. My job is to return their capital as soon as I can and to get them returns.

And I think that there's a lot of GPs that still think a little bit of the old way, which is I'm going to invest the money and give a ride to every dollar I can and keep it going to get the best return, but what we're seeing is that that's not working. So for our focus is to hold brands for a period of 3 to 5 years. We're not looking at holding these brands 7, 10 years, 15 years, asking for extensions. It is to grow them to where we can get our base, which we underwrite it 4 and 5 times whenever we make an investment. If it doesn't have that headroom, then we don't invest.

And our baseline is a 3x return, so when we invest, we say if we can get a 3x plus, we're selling that brand and we're distributing the capital out to the investors, where I think a lot of funds out there, they'll sell their brands and then they'll take that money and then recycle and continue to ride on that. We understand DPI is the most important metric right now and we want to return our capital to our investors as soon as possible.

The buyers for our assets too are pretty unique. The subset of buyers is growing. Larger private equity is looking for this segment because it's cash flowing, it's asset backed, it's non-correlated. So private equity generalist funds are seeing this as a sleeve that they have to put money into. And there is a large pool of private equity. Not only have groups that have been in it for a long time, but new ones entering as well every month. We get inbound calls from a lot of new private equity that want to buy our platform brands.

There are also multi-branded houses where they manage or that they're large franchisees of big systems like Yum Brands or others, and they're looking for the opportunity to buy a new brand and to put it into their system. We have a lot of multi-brand houses at the table looking at our brands and wanting to make investments and to own those as well.

And then last one is the family offices. There's obviously a lot of money within the family office industry right now and many have a hospitality bucket where they have hotels, but they're putting hotels and resorts, food and beverage into the hospitality bucket as well.

They like that category for the same reasons that that private equity does. And it's patient capital, a lot of these groups are looking at this to buy them and hold them for 10 years and maybe even build them into a nice cash generating coupon clipping type of assets.

So we have a lot of exit potential and opportunities, so buying these and selling them when they're really emerging elite brands now where they have all the momentum and they have all of the pizzazz in the industry and all the PR and everyone's talking about it. Those are the brands that all of those categories of buyers want, and that's what Savory does with each of the brands. They make him the cool kid on the block that everybody wants to hang out with.

My last comment to any investor that would be looking at anything is when you make an investment, you shouldn’t make an investment thinking we're going to go spray out money to 20 or 30 different assets, and we really, really hope that 2 or 3 of them are huge home runs because we know we're going to lose on all the other ones. In my mind, that's not a good investment strategy. Rather it's buy fewer assets and dig in deeper into these companies and go find the alpha in each of them, cause they were great when we bought them. They weren't turnarounds, they weren't something that wasn't working. We're just taking them and we're straight line growing them and getting the arbitrage of that. Growth and that's how we create value for our LPs. There's no heroics in what we're doing. It's just hard work, and we're not afraid of hard work, and that's why we have the history and we have the success that we have because we've been in the industry for 17 years, and we've done it repeatedly, and we know how to repeat it again.

[Bobby]  Well, that's great. And I'll finish by tooting your horn for you. You've done a great job on the exits as well with your 2019 Fund I vintage already approaching 100% DPI and likely to beyond that this year. So, great job.

And most importantly, thanks very much. This has been super helpful, super insightful, and look forward to doing this again soon.