Why Private Equity-Backed Tenants Can Be a Double-Edged Sword

In the fast-paced world of net lease investing, many retail and service brands that appear stable on the surface are actually owned — or heavily influenced — by private equity (PE) firms behind the scenes.

For NNN investors, that can mean opportunity—but also hidden risk.

Private equity-backed tenants can offer:

  • High cap rates

  • Aggressive expansion

  • Scalable investment portfolios

But they can also bring:

  • Increased credit risk

  • Volatility at exit

  • Complex lease structures designed to favor the PE firm, not the landlord

In this article, we’ll break down:

  • What it means when a tenant is private equity-owned

  • Why some PE deals are great income generators, while others are short-term yield traps

  • Which U.S. tenant brands are backed by PE — and how to underwrite them properly

🔹 What Is a Private Equity-Backed Tenant?

A private equity-backed tenant is a brand (or franchise operator) that has been acquired, recapitalized, or restructured by a private equity firm. These firms typically:

  • Use leverage (debt) to fund expansion

  • Aim to grow fast, cut costs, and flip the company

  • Focus on returns for investors, not necessarily lease longevity

In a NNN lease context, the corporate credit behind the tenant may be:

  • Thin (due to debt)

  • Aggressive (rapid growth, short-term lease logic)

  • Or even non-existent (if you’re leasing to a franchisee with a PE parent)

🔹 Why Private Equity Tenants Appeal to NNN Investors

There’s a reason many investors are drawn to these deals:

✅ 1. Higher Cap Rates

PE-backed tenants typically trade 50–150 bps above corporate-backed equivalents. That means more yield.

✅ 2. Strong Brands

The PE firm often owns or acquires well-known regional or national chains, giving the illusion of credit stability.

✅ 3. Aggressive Expansion = Deal Volume

Private equity firms often scale rapidly, so there are more NNN properties to choose from — especially in QSR, medical, and automotive sectors.

🔹 The Hidden Risks of PE-Backed NNN Tenants

Despite the benefits, there are key risks that every investor must understand:

❌ 1. Debt-Loaded Balance Sheets

Private equity acquisitions are almost always highly leveraged. That means the operating company is carrying a heavy debt burden, which increases bankruptcy risk — especially in a downturn.

❌ 2. Lease Manipulation

PE firms may structure leases to favor short-term returns, including:

  • Front-loading rent escalations

  • Sale-leasebacks at inflated rents

  • Shorter lease terms to boost exit value, not investor security

❌ 3. Exit Risk

Buyers who don’t recognize the PE risk profile may balk at your resale, compressing value or increasing time on market.

❌ 4. Franchise Roll-Ups

Some PE firms consolidate dozens or hundreds of franchisee units — but the underlying leases are guaranteed by fragmented LLCs, not the private equity firm itself.

🔹 Real-World Tenant Examples (PE-Backed)

Here are some well-known U.S. brands that are either owned, rolled up, or significantly backed by private equity:

🟡 Planet Fitness

  • Backed By: TSG Consumer Partners (franchise level)

  • Model: 90% franchisee-operated

  • Risk: Some franchisees are PE roll-ups with high debt and unclear guarantees

  • Tip: Only pursue if the lease is guaranteed by a multi-unit, established group with strong financials

🟡 Arby’s (Inspire Brands)

  • Backed By: Roark Capital

  • Model: Mix of corporate and large-scale franchisees

  • Risk: Inspire is well-capitalized, but many franchisees are PE-funded and operate on thin margins

  • Tip: Ask for tenant financials and validate who’s behind the lease

🟡 Checkers & Rally’s

  • Backed By: Oak Hill Capital

  • Model: Many leases are franchisee-backed

  • Risk: Elevated cap rates reflect higher volatility

  • Tip: Avoid 1–2 unit operators unless the lease has a strong personal guarantee

🟡 Massage Envy

  • Backed By: KSL Capital Partners

  • Model: Franchisee system

  • Risk: Private operators with limited liquidity, especially post-COVID

  • Tip: Verify unit-level performance and personal guarantees

🟡 ModWash

  • Backed By: Golden Gate Capital

  • Model: Roll-up of express car wash sites

  • Risk: Many locations are new-to-market, unproven, and in secondary markets

  • Tip: Be wary of inflated rents on sale-leasebacks designed to boost short-term IRR

🟡 Great Clips

  • Backed By: Franchisees; several with PE investment

  • Risk: Small unit economics; location-sensitive; leases often short

  • Tip: Accept only long-term leases with proven operators and solid demographics

🔹 How to Properly Underwrite PE-Backed Tenants

✅ 1. Verify the Lease Guarantor

Is the lease guaranteed by:

  • The private equity firm? (Very rare)

  • The brand’s corporate entity?

  • A local LLC or franchisee?

Only the actual guarantor matters in court — not the logo on the sign.

✅ 2. Request Financials

If you’re buying from a franchisee or PE-backed operator, request:

  • P&L statements

  • Balance sheets

  • Store-level sales history

  • Rent-to-sales ratio (aim for <10%)

✅ 3. Scrutinize Lease Structure

  • Are there rent escalations that seem aggressive?

  • Are you buying at a high rent relative to market?

  • Does the lease include early termination clauses or assignment flexibilities?

Remember: PE firms often prioritize sale-leaseback IRR, not your long-term income stream.

✅ 4. Stress-Test the Exit

Assume the tenant doesn’t renew in 10 years:

  • Is the real estate re-tenantable?

  • Are you overpaying today based on PE-boosted NOI?

  • Will future buyers discount the lease due to the tenant’s credit profile?

FAQ – Private Equity Tenants in NNN Investing

Q1: Should I avoid all PE-backed tenants?

No — many deals are high-performing and well-structured. But you must go beyond the brand name and underwrite the actual lease guarantor and financial strength. Avoid operators with no transparency, short lease terms, or inflated rents.

Q2: What are signs a lease has been “engineered” by private equity?

Look out for:

  • Very high starting rents

  • Short initial lease term (under 10 years)

  • Rent bumps front-loaded in first 5 years

  • Sale-leaseback structure with little tenant history at that location

Q3: Are these deals harder to finance?

Sometimes. If the lease is backed by a private LLC with limited financials, lenders may require:

  • Lower LTV (50%–60%)

  • Higher rates

  • Full personal guarantees
    Corporate credit or franchisees with audited financials perform better with lenders.

Conclusion: Proceed, But With Precision

Private equity has helped expand many beloved retail brands — but that growth often comes with short-term thinking, financial engineering, and exit-driven logic.

For NNN investors, PE-backed tenants offer:

  • Higher yield

  • Larger deal volume

  • Diversification

But they also require deeper diligence, smarter underwriting, and stronger lease control.

If you’re evaluating a deal right now with a PE-backed tenant — or need help decoding the lease risk and real exit value…

Let’s transact.