PricewaterhouseCoopers (PwC), the multinational accounting and auditing firm, started the year off by sharing that we were in the midst of one of the worst M&A bear markets that the country had seen in more than a decade. Pretty strong statement and the world wondered why. We’d found our way out of a global pandemic only to be faced with inflation and rising interest rates. Construction lending was painful, at best. And M&A activity stopped.
As with most things in life, inactivity only lasts so long. The muscles start twitching, and the urge to move overcomes the stalemate. For those who have spent some time on this Earth, the cyclical nature of things is profound and persistent.
“I had been educated in the rhythms of the mountain, rhythms in which change was never fundamental, only cyclical. The same sun appeared each morning, swept over the valley, and dropped behind the peak. The snows that fell in winter always melted in the spring.” –Tara Westover.
So, what does that have to do with restaurant investing in 2024? Everything.
The Cyclical Nature of Investing
For over a decade, interest rates were such that money was almost free. Then, as nature suggests, the cycle began shifting. The cost of materials, labor, building, and financing nearly reached an all-time high. Now, the tide is turning.
The first half of 2024 finally saw construction costs somewhat stabilizing. May saw a decrease in construction input prices of almost 1%, the first decrease in 2024.
Construction Dive shared insights from Macrina Wilkins, senior research analyst with the Associate General Contractors of America, “Even with year-over-year price increases, project costs on the ground have largely remained stable…While some prices for construction materials have shown fluctuations, it is not significantly impacting the cost of projects. The bid prices remain unchanged and new nonresidential construction declined 0.6% for the month.”
QSR reached out to Chris Elliott, CEO of FSC Franchise Co., who believes M&A will gain ground in 2024. “From a private equity standpoint, there’s a lot of dry powder, meaning, there’s a lot of people that are looking and have money to spend. Sellers are getting better valuations and are looking to make a deal. If we get some favorable news from the Fed on interest rates, that will be a positive indicator to the market that now is a time to consider M&A. The biggest obstacle to deals in 2024, will be agreement between seller and buyer on valuation.”
So, when will the interest rates go down?
Interest Rates and a Crystal Ball
Following its July 30-31 meeting, the Federal Reserve announced that it is holding interest rates steady. The cyclical nature of things seems to have bypassed the independent central bank, which has left rates unchanged for the ninth time in the last 10 meetings. Keep in mind that they’ve raised it 11 times as they attempted to hold inflation at bay.
Where exactly are we with inflation? According to the numbers, inflation reached its highest level at 9% in the midst of 2022. In June 2024, it hit 3%. As it moves toward the targeted 2%, the market watchers’ crystal ball suggests possibly lower rates in September. The balancing act in play: a high enough rate to keep inflation tamed, but not so high to affect economic growth. That is a tightrope worthy of the greatest trapeze artist.
The Lending Landscape
Because banks are not eager to lend, the market is ripe for investor-operator partnerships. When traditional markets dry up, emerging and growth-minded brands seek funds elsewhere. Venture capital, crowdfunding, and undergoing an initial public offering (IPO) have all been targeted as a means to raise capital. In 2023, out of 154 IPOs, four were food companies, including CAVA Group, Inc., and GEN Restaurant Group, Inc. CAVA raised $318 million when it went public in June.
During this time, the EMERGING Fund has been busy investing in innovative restaurants, social entertainment concepts, and restaurant technology. A recent interview with Mathew Focht, the founder and CEO of EMERGING and GP of EMERGING Fund, demonstrated their growth-minded attitude.
Brands looking to advance should look deeply into their growth stage. Are they filling a need? What differentiates them from what’s already out there? What is their growth outlook?
When you come to the table prepared, you have a much better chance of reaching your goals.
