The popular Lebanese food chain Kabab-ji is a success story of entrepreneurial knack, making the restaurant an attractive target for private equity investment. The restaurant recently received growth capital from a financing round led by MENA Capital with several co- investing limited partners. The deal is the first of its kind, with a Lebanese business reaching out to a Lebanese private equity shop to finance growth outside of the Middle East’s own burgeoning economies to a Western consumer market.
Kabab-ji has a history of product freshness since its owner and CEO Toufic Khoueiri first started the chain in 1993. Its reputation has since allowed it to expand to franchises throughout the Middle East with locations in Bahrain, Jordan, Kuwait, Qatar, Saudi Arabia, Sudan, and the UAE, making it the preeminent Lebanese food chain. With its menu of fresh and health-oriented cuisines, the franchise is looking to expand to the US market where there is a high demand for good quality food at reasonable prices. While Kabab-ji’s management recognized and believed in the potentials, the deal was dependent on MENA Capital’s own judgment and decision to work with the business in expanding and operating in a new and quite different market.
According to Ziad Maalouf, MENA Capital’s senior vice president, the firm chose to finance the deal because “the increasing acceptance of ethnic foods in the US is creating long-term market opportunities for concepts such as Kabab-ji.” Maalouf acknowledged the fierce competition in the US’ traditional fast-food sector and the domination of mega-chains that are not only recognized in the States but the world over, but also pointed out that “a clear leader has yet to emerge in the small ethnic segments such as Lebanese/Mediterranean food.”
The idea certainly holds promise. With the restaurant set to open in the heart of Washington, DC, it can expect instant popularity from a crowd of young professionals and others who are already spending their evenings at Tapas Bars, and Ethiopian and Indian restaurants. Once the establishment is open for business, Americans can benefit from authentic shish taouk, kibbeh and labneh complemented by fresh hummus, fattoush, and wara’ ainab. If the meals are matched with traditional Lebanese drinks, other producers in Lebanon might seize the opportunity to market araq to match desserts in the summer, or one of many Bekaa- produced vintages throughout the year. According to Maalouf, “consumers of Lebanese/Mediterranean and other less mainstream ethnic foods have often scarified on issues such as comfortable surroundings and excellent service in exchange for the ability to try something new and exotic.” Thus, he believes that, “Kabab-ji’s focus on quality, freshness, and tasteful food should position the company well to become the leading brand in the fast- casual segment of this cuisine.”
The meat of the deal
MENA Capital structured the deal as a joint-venture between Khoueiri and the MENA Capital Private Equity Fund I with capital commitments of $50 million. According to Maalouf, “Kabab-ji will bring the name, know-how, management, and vast experience in the field, while the Fund and the other investors will provide capital, financial oversight and assist in the business strategy.” The deal’s strategy is longer than some with an exit foreseen in five to seven years via an initial public offering or a strategic sale to an industry leader in the US. MENA Capital estimates a very lucrative finishing position for the deal with an exit that will yield an internalized rate of return of over 35%. Although the make- up of MENA Capital’s limited partners is unclear, the deal indicates that other possibilities for Lebanese firms looking for private equity to finance growth outside of the region are viable and MENA Capital has expressed a willingness to “assist the company’s growth until the time is ripe for exit,” according to Maalouf. Ideally, Kabab-ji could achieve initial success and attract more funding from MENA Capital if there are viable opportunities to expand once in the US.
Family over franchise
Although private equity helped Kabab-ji’s plans to expand into the US market, not all financing has to come through fund managers and return-seeking investors. Indeed, the strong cohesion of the family model found in the Middle East retains its roots in the US as well and Lebanese Taverna, a popular Washington, DC restaurant chain, has been a showcase for how to harness the traditional business model of Lebanese firms and achieve success in the US market without outside capital. Lebanese Taverna started as a single restaurant in 1979 after Tanios Abi- Najm moved his family from Lebanon to the US in 1976. According to his son and co-founder Dany Abi-Najm, the idea behind the restaurant was “taking a chance and working as a family, pooling all our resources” to help get the business going. The Abi-Najm family started the first restaurant with family financing and co-signed loans. What began as a single restaurant supported by an idea has grown into 11 branches throughout the metropolitan DC area after the family self-financed several expansions by reinvesting profits and using personal savings as capital.
Opportunities for others
Maalouf wants to replicate the strategy and is confident that “there are many opportunities for Lebanese companies to expand in the US market, especially companies in the food and hospitality sectors.” He prefaced this with the caution that doing business in the US is very different from Lebanon, and requires more complex arrangements, believing that any US expansion “should be carried out with the help and guidance of professional investment firms like MENA Capital that can assist in not only analyzing the viability of the investment with regard to its potential risks and rewards, but also in structuring the complex legal and capital aspect of the transaction, securing strategic partners, if needed, and helping introduce the concept to the US market through strategic planning and brand positioning.”
