The pandemic decimated U.S. restaurants: An estimated 90,000 restaurants shut down, 5.9 million workers lost their jobs, and nearly a quarter of Americans stopped eating out entirely. Even today, half of small restaurants struggle to pay rent, and many operate at limited capacity and struggle to hire workers and get supplies like paper napkins and to-go boxes.

Yet if you ask Andrew K. Smith, he’ll tell you it’s a perfect time to get aggressive in the restaurant industry. As managing director of the Mercado Partners' Savory Fund, he doubled-down on restaurants even when one in six eateries shut down and 3 million people lost their jobs. Since the pandemic’s start, the Salt Lake City-based Savory raised two separate funds—$100 million each—and aggressively invested in seven new restaurant brands and opened 55 new restaurants.

The U.S. restaurant industry has never been a slam dunk for investors. Even the most experienced operators tend to record single digit profit margins. So when the pandemic crushed restaurants across the nation, leading the industry to record a $200 billion decline in sales last year, most investors ran the other way. Smith said he’s never bought into the narrative that you can't make money backing restaurants. “It’s an unearned and undeserved fallacy,” Smith said.

Smith spent years as an investor and the CEO of three software companies, but he has never actually run a restaurant. He defected from the technology industry after a decade of surviving the 2000 dot-com crash and later the 2008 recession. As CEO of AxisPointe, a risk management software company for the construction industry, Smith recalls staring at the ceiling in bed one night and realizing he wanted to get out of an industry so susceptible to market swings. “I felt so out of control as a tech CEO.”

Smith decided to jump into the food industry with his wife, Shauna, who had started her own bakery and cafe. Realizing that eateries are a mostly shock absorbent industry, garnering daily and monthly cash flow and some cushion from major economic dips, the two cofounded Four Food Groups, a restaurant investment firm.

“People will always eat out,” he said. “And I like that it brings happiness and comfort to many, something that I did not feel like I got in tech.”

A decade later, in 2018, Smith joined Utah private equity firm Mercado Partners. He met Mercado founder Greg Warnock racing cars with him on the weekends, and Warnock teamed up with the Smiths to establish the Savory Fund within the firm.

In October 2020, the fund invested in a modern fried chicken restaurant with six locations in Southern California, with plans to fuel a 50-store expansion. And throughout the pandemic, the fund was also busy opening seven new stores for Swig, a drive-thru soda chain with customized flavors. Known as Utah’s “home of the Dirty Soda,” Swig added another 10 this year. This fall, Savory invested $20 million in Pincho, a Latin burger and kabob restaurant chain in South Florida, and put $20 million behind Austin pizza chain Via 313. “The industry is the most alive I’ve seen in 15 years,” Smith said.

It might seem as though Smith is living in the Twilight Zone. Afterall, the pandemic crushed private equity investments in the restaurant, hotel and leisure sector, down from 53 deals in 2019 to just eight in the first half of 2021. The number of private-equity backed restaurant chains that filed for bankruptcy grew to 14 this year, up from just four in 2019 and includes names like Ruby Tuesday, Chuck E. Cheese, and California Pizza Kitchen. Sun Capital Partners, which bet on Boston Market and Johnny Rockets, has abandoned restaurant deals entirely. If they do invest, most private equity firms have grown so large they typically invest no less than $100 million into a restaurant deal today, said Smith.

“Savory had a bit of a Warren Buffet moment—who once said investors should be ‘fearful when others are greedy, and greedy when others are fearful,’” said Jimmy Frischling, managing partner of Branded Strategic Hospitality, which owns 25 New York restaurants and invests in tech startups that cater to restaurants. Frischling can appreciate Smith’s mentality about running toward expansion, because his firm, too, did the opposite of most and embraced aggressive growth in the pandemic.

Expansion sounded great to Zane and Brandon Hunt, too. But the two brothers, who started Via 313 pizza in 2011, didn’t have enough cash to grow nationwide—and no idea how to do it. They started as a single pizza food truck as a salute to their Midwest youth, eating endless amounts of “Detroit-style pizza." They added a second a year later, and then opened three restaurant locations within three years. After a banker told them their restaurant’s valuation could be as high as $50 million, they began talking to investment bankers last year for help to expand. Smith just happened to eat at one of their restaurants—and loved it enough to back it.

Savory invested $20 million into the pizza chain and has helped Via 313 to open one new restaurant in Orem, Utah, and start construction on two more, with 12 more locations set to open next year. While Brandon Hunt admits that it was scary to continue expansion as the industry and pandemic worsened, he appreciates Smith’s attitude of seeing opportunity—even in the worst of times. His brother added: “It's like hitting the gas pedal at a time when everyone else is slowing down.”

Savory is tackling a slice of the market that most PE firms avoid—smaller chains with emerging concepts that have at least $1.5 million to $3.5 million in revenue and two to eight locations. Most big investment firms want to see 50 locations nationwide, said Frischling, which reduces risk—but also limits returns. That’s tough for restaurant owners to get to that size: At least half of the nation’s restaurants are small mom-and-pop restaurants that bootstrap and operate in a just-in-time manner.

Savory typically makes initial $6 million to $10 million investments for controlling interest in the restaurants and then puts up to $10 million to $14 million more in for expansion.

As the Delta wave begins to recede, restaurant sales are starting to perk back up, but restaurants are still feeling the long-haul effects of COVID-19. Help wanted signs decorate window fronts, thanks to a severe labor shortage with 1.4 million job openings in the industry. Some fast food chains, including White Castle, McDonalds and Taco Bell, still have closed or limited indoor dining areas because of COVID. Others, like Starbucks, have had to reduce schedules because of the labor shortage. And now, restaurants everywhere face a major shortage of supplies, such as cups, lids, straws, plates, and to-go boxes. Smith said he hopes his strategy of unique concepts and strong fan bases—and diverse employees who are well paid— will make his restaurants “the cool kid” that attracts workers. He also encourages restaurants to constantly innovate—and stock up on products in advance.

“It’s an economic pandemic now,” said Smith. “There’s an influx in demand with limited supply.”