Union Square Fund Enables Operational ‘Cross Pollination’

Union Square Hospitality Group has closed on a $220 million fund primarily targeting restaurants and restaurant technology. But the fund comes with a little extra twist for portfolio companies: being plugged into the Danny Meyer empire.

The Enlightened Hospitality Investments LP (EHI) fund will primarily make minority investments of $10-20 million in growth companies with a special nod to companies that fit USHG’s vision of enlightened hospitality, the strategy and mindset of prioritizing employees among all other stakeholders. 

"Enlightened Hospitality Investments allows us to find and fuel growth for best-in-class culture-driven businesses that are on the precipice of doing great things," said Danny Meyer, founder and chief executive officer of Union Square Hospitality Group, said in a press release. "EHI provides us with a strategic investment vehicle to formalize future transactions and bring the benefits of our experience and relationships, which we have cultivated through USHG, to beloved companies that share our passion for our team and community."

Mark Leavitt, the chief investment officer at USHG and former head of Piper Jaffray’s Telecom Media and Technology investment banking practice, will oversee the fund. He said it formalizes the investment practice for the group.

"The main goal is to really be more intentional about our activities on the investing side. Over time, Danny had seen lots of companies and they would come to him for both strategic advice as well as financial support," said Leavitt. "In the past, we were able to offer strategic advice, but now we’ve got a $220 million fund to pair with strategic advice to provide growth capital as well."

The fund has already made three investments. The 10-unit Salt & Straw Ice Cream out of Portland, the 16-unit Joe Coffee, and Resy Network—a New York-based restaurant reservation software business in 40 markets—have all received investments. Both restaurant concepts fit in well with the USHG halo of enlightened hospitality, the namesake mission for the fund.

"Danny described it at our LP meeting earlier this week, he said, ‘We set this up because we wanted to show that nice guys can finish first,’" said Leavitt. "I think there are enough companies that believe this is a differentiator, and I think people all call it different things but you kind of know it when you see it. We watch the way companies behave and prioritize their stakeholders, they may not say this is ‘enlightened hospitality’ but it’s really the same thing."

Structure wise, it’s a pretty standard 10-year private equity fund with five years to make investments and another five years to harvest. But limited partners consist of family offices, institutional investors and strategic investors looking for the next growth vehicles.

"What was interesting is we’ve got a group of people on the investor side who are big owners of real estate and licensors of various food brands around the world that were interested in seeing what kind of future stars we could pick that may make to live within their companies as well," said Leavitt.

He said as private equity matures as an industry, the focus on bringing portfolio companies into the USHG family of brands could be a differentiator for the fund. The USHG concept Daily Provisions introduced Salt & Straw to the New York market and also sells Joe Coffee. And there’s other cross-pollination between the brands already, which could be a big selling point to growth brands.

"Salt & Straw makes three types of ice cream [at Daily Provisions], one of which is a coffee ice cream made from Joe Coffee. So we think we’re off to a good start of cross collaborating with the brands," said Leavitt. "We think in an industry that’s gotten increasingly commoditized, like the private equity business, that having a fund within an operating company gives us potentially a distinct advantage if we do our jobs well."

Key personnel will likely play a larger role in portfolio companies as well. Mike Anthony, the James Beard-decorated executive chef at Gramercy Tavern, spent several days in Portland developing recipes and working at Salt & Straw.

"It is a big theme," said Leavitt. "We have the expectation that we’ll be offered earlier looks at companies at favorable terms because we can bring that strategic value in addition to just money."

He said the fund would primarily (but not exclusively) invest 70% in restaurants ("fine casual" specifically) and the remainder in hospitality-facing technology like Resy Network. He said he saw a growing body of companies in the hospitality space during his time at Piper Jaffray.

"They’re all businesses generally aimed at either taking costs out of the restaurant operation though improved efficiencies or making it a better experience for the diner," said Leavitt. "Things like reservations systems, where we made an investment already, payment systems or food delivery systems, which is still an interesting space for us to monitor."

Expect more announcements from the fund in the next three to six months. And if the operational strategy continues to work for USHG, expect some very similar funds in the near future.

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