Recent Torchy's Deal

Torchy's Tacos just raised $400mm from General Atlantic, D1, T Rowe, etc to expand nationwide. GA was an existing investor prior to the deal. One publication referenced how they don't have any debt in the cap table. Given the uber low cost of capital for debt, why wouldn't Torchy's/GA raise debt to fund their expansion? If risk was a concern, wouldn't non-recourse debt still be much lower CoC than equity? Wanted to better understand their motivations. Thanks.

 
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Operating history is irrelevant here. Restaurants are a super low-margin business and we’re facing a new wave of the pandemic - very strong chance they’d have trouble finding commercial lenders willing to give them any capital right now.

Equity also isn’t constrained by the current size of the business - even if they are generating cash, they may see opportunities to deploy $400M in capital but the core business could only support $40M in debt (for example).

Even if there aren’t huge cost savings (although you absolutely do see some from ordering supplies at scale), there’s definitely operating leverage inherent in scaling the business

 

They don't have to be low margin. The mom and pops are low margin, but there are higher-margin models (nothing like software though). The reason they didn't use debt is probably because of the cost of servicing it over time. The operating history is likely related to the original TX locations but something that could be extrapolated to where they want to expand aggressively (new markets, new risk). The money may also be used to further professionalize the business. On a quick glance, I noticed there wasn't an app for this restaurant. This seems to be table stakes for high-growth QSR these days. SG does about 50% of order volume via mobile, Furthermore, they want to expand new locations in different formats or try new concepts. Venture $$ is just more flexible in terms of usage and capacity, though it is more expensive.

 

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