You'd never know there was a recession if you talked to Eric Casaburi. The founder of Retrofitness, Colts Neck, NJ, speaks animatedly about how he plans to expand his 40 corporate and franchised clubs by 350 in the next three years. And he says he has the money to do it.

Casaburi's private equity partner, Lake Capital, Chicago, was one of several companies that wooed Casaburi, finally winning him over and infusing an undisclosed amount of capital into his company last fall (although Lake Capital's Web site says it typically commits $50 million to $75 million of equity into companies). The private equity firm just infused another $5 million into Retrofitness this spring.

“We joke around in the office that we are in the ‘Retro’ bubble,” Casaburi says. “Not that we don't feel bad that there's a recession, but actually, it's fueled my company's growth.”

With $1.2 billion under asset management, Lake Capital wants to spread its money around but can't seem to find the right fit, Casaburi says. One of the private equity firm's principals told Casaburi recently that he typically looks at 2,000 businesses a year and buys about four, but this year he may have to look at 4,000 businesses and buy just two.

Lake Capital isn't the only investor itching to get a piece of the health club industry. More than a dozen private equity-funded deals occurred in the industry in the past three to four years, according to Peter Moore, principal, head of the Active Lifestyle & Wellness Group at Sagent Advisors, an investment banking firm based in New York. However, the tighter credit market and almost nonexistent debt market has slowed investment in the fitness industry as much as in most other industries, many people familiar with the situation say. They also agree that capital is still available for proven business models and club operators who know where to look.

“When the dust settles, there will be continued interest in the space because I think the health club industry groups that provide a high level of service at a reasonable price and have recurring revenue streams are inherently good business models,” Moore says.

Brian Smith, principal at San Francisco-based Partnership Capital Growth, a broker dealer that provides merger and acquisition, financing and capital structure advisory services to middle market companies, agrees that the growth potential and cash flow dynamics of the club industry are appealing to investors. Although clubs require continual reinvestment, the return on that is often in excess of 20 percent, which is a great option for investors, Smith says.

In Their Words

Last year, Summit Partners, a global growth equity investor with offices in Boston, Palo Alto, CA, and London, invested in Snap Fitness, Chanhassen, MN.

Summit Partners has raised more than $11 billion in capital in its 25 years and has made more than 300 investments, yet Snap Fitness is Summit Partners' first foray into the fitness business. Summit Partners had been looking to get into the fitness and health and wellness sector for more than 20 years, says Peter Rottier, a Summit Partners vice president.

“The challenges we've always had is that the traditional club market was very capital intensive from a growth perspective,” says Rottier, who would not disclose the amount of the investment into Snap Fitness. “If you have a store, in order to open your next store, it takes a lot of money. We always kind of wrestled with that.”

Rottier, who joined the Snap Fitness board of directors upon completion of the investment, says Summit Partners contacted Snap Fitness CEO and founder Peter Taunton about 2 ½ years ago. When Summit Partners examined the 24-hour key-card club model, the company saw not only growth potential but also capital efficiency with Snap Fitness' low overhead and little or no staff on hand at the clubs, Rottier says.

Despite the looming recession, Summit Partners made the investment in Snap Fitness in May 2008 with the belief that the fitness club industry has held up during past economic downturns.

“We spent time thinking about it, and we thought that Snap would be at least better positioned than most to weather the storm here,” Rottier says. “I like our positioning in a challenging market, being a value-priced concept that also offers a lot of convenience to our customers.”

WestView Capital Partners, Boston, liked what it saw in Titan Fitness Holdings, McLean, VA, one of the largest Gold's Gym franchisees in the United States. Titan Fitness plans to grow from 16 clubs in North Carolina, Minnesota and Nevada to 60 over the next five years. WestView has invested about $2 million into the clubs so far, says Matt Carroll, a general partner with WestView. That money went into acquiring clubs and for capital expenditures, such as cosmetic improvements, facility upgrades and equipment upgrades.

“We've got a significant amount of equity behind the business that hasn't been invested yet,” Carroll says. “We have a bank line with a couple of different banks that we took on where we can tap those lenders as we grow. What we've been most cautious about is we want to make sure that we're buying good assets that are going to perform for us. We're very sensitive to make sure that we don't leverage the business. The idea is to use bank financing down the road to help us do more acquisitions and to build new clubs.”

Moving Slowly

Getting bank financing is proving more difficult for many in the industry because of the lack of a debt market, according to Sharon Zackfia, analyst with William Blair & Co., an investment firm in Chicago.

Rottier says funds are available for club operators in the private equity and venture capital world, although the process of getting to those funds has become more challenging. Some private equity firms are unable to raise funds and some may close, he says.

“The availability of financing today in the private equity world is less than what it was two years ago, and the hurdle for those investment dollars is much higher,” Rottier says.

Although interest is still there, many investors are on hold for now until the tides turn. That pause means a slowdown in new club openings for many operators. Publicly traded companies Life Time Fitness, Chanhassen, MN, and Town Sports International (TSI), both of which Zackfia follows, are opening fewer new clubs in 2009 than 2008. TSI, New York, opened nine clubs in 2008 but will open just four clubs this year. Life Time is scheduled to open seven or eight clubs this year after opening 11 clubs last year.

“What we're seeing in the health club industry is pretty similar to what we're seeing in other publicly traded retailers or restaurants,” Zackfia says. “Obviously, profits are under some pressure, but also there's the consideration that real estate costs may come down further, whether you are talking about buying the real estate or whether you're talking about leasing the real estate. To the extent that there's pressure on real estate pricing, there's a real fundamental question about the urgency of opening a location.”

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