Stocks are down. Bonds are down. What’s still hot?

Doughnuts! That’s what the new team at NewSpring Capital is betting on.

The private-investment group, based in Radnor, manages $2.5 billion for investors, and has pumped much of it into the kind of growing companies you might expect a digital-era investment firm to buy: medical devices, business software, specialty manufacturers, and retailers.

But lately it’s big into fried sweet cake rings:

Last month, NewSpring bought a big stake in Philadelphia-based Federal Donuts and its 11 stores, mostly in Center City, from chief executive Tom Henneman and backers led by Steve Cook and Michael Solomonov, founders of Zahav and other CookNSolo restaurants. Henneman is staying on as CEO, while Cook and Solomonov remain minority investors.

This year, NewSpring is also adding at least 40 franchised stores under the Mechanicsburg, Pa.-based Duck Donuts chain, in which it bought a controlling stake last year. The chain already has 102 outposts, from California to Dubai, but mostly in the mid-Atlantic, including King of Prussia, Marlton, and other suburban locations. Founder Russell DiGilio remains part-owner; his chief operating officer, Betsy Hamm, has stepped up as CEO.

How did doughnuts push out biotech and info tech? NewSpring partners Satya Ponnuru and Patrick Sugrue, who head the newest of the firm’s five investment groups, set us straight in an interview, edited for clarity and brevity:

Q: What’s with all the doughnuts?

Ponnuru: You know our founders: Mike DiPiano was CEO of multiple businesses, Marc Lederman set up the finance and investment side. Their focus, since they started NewSpring in 1999, was to bring real-world operating experience to bear on companies in fragmented markets that are growing faster than the larger economy and had the potential to scale a lot bigger. (Instead of investing in larger companies as it grows, NewSpring invests in more small companies.) So we’re building on that foundation.

We joined NewSpring and launched this new strategy in early 2020: “Let’s make a handful of investments in consumer markets. We’ll partner with founders of great brands that could support an accelerated growth plan.” And two of our first four investments were doughnuts.

Q: Are you mashing them into one global doughnut empire?

Ponnuru: These two are fundamentally different from each other. They have individually great brands, customer value propositions that are off the charts, and the ability to grow substantially.

Q: Why franchise instead of running the stores directly?

Sugrue: Franchising, as an investment vehicle, has been a good place to put your money for a long time. Roark Capital down in Atlanta has shown the power of that in restaurants, with its Inspire Brands (Arby’s, Buffalo Wild Wings) and, Focus Brands (Auntie Anne’s, Carvel Ice Cream, Cinnabon, Moe’s Southwest Grill). Those are large, national brands. For us at NewSpring, the lower-middle market really fits.

Before I joined Satya to start this team at NewSpring, I’ve been in this business for 25 years. I started with Gallo wines and Coca-Cola. I was at HoneyBaked Ham and Saladworks. It’s all about really knowing your brands — and being able to follow consumer trends, recognize which are fads and which have staying power. You look for great leadership, and for [per store] economics that make it likely you will succeed five years after a grand opening. And technology that makes less friction and more operational and delivery efficiency.

Ponnuru: Pat and I think very differently. He has great experience in running a business. I spent 10 years at Larsen MacColl Partners; I helped them invest in a few restaurant concepts, raising capital, and putting them on a growth plan.

Sugrue: When we first sat down to plan this for NewSpring [at Estia Greek Taverna in Radnor at the end of 2019], we talked for three hours, we saw it was meant to be.

Q: Why now?

Sugrue: In times of upheaval, after 911 and again after COVID, there are successful people who want more control of their life, to be their own boss, not an element in some corporate infrastructure. So there’s a significant uptick of prospective franchisees.

When this happened in prior economic disruptions, there was also a contraction of access to capital, so it was hard to fund some of those ventures. But this time, uniquely, it’s happening as personal assets have increased in value — your house and your portfolio have been worth significantly more than they used to be. So you say, “I want to fund my own business and be a franchise boss.”

Q: There are already national doughnut chains. Isn’t this like a local burger joint challenging McDonald’s?

Ponnuru: If you look at Dunkin’s financials, you’ll find maybe 15% of their business is doughnuts. Their customer is primarily going in for the coffee.

Duck is the largest customized, made-to-order doughnut concept in the United States. When the customer walks in there, you see this hot, fresh doughnut coming right out of the fryer. Then you get to create it the way you want it. With your child. Or your grandparent. Everything is made fresh to offer. We also sell coffee, but it’s a small program. This brand is built around the customer experience.

The founder, Russ DiGilio, grew up in Pennsylvania but he went to Duck, N.C. to vacation, on the beach at the Outer Banks. They had these doughnut shops that served a lot of the beach visitors. He loved it there; he opened Duck Donuts [in 2007]. And people kept coming to him, saying, “I’d love to have one of those where we live.”

He started franchising [in 2013]. They grew without a lot of advertising but with a high degree of confidence. A lot on the East Coast, but what really got us excited, they were starting to penetrate the West — California, Arizona, and Idaho.

Q: Federal was started by high-powered Philly restaurant people. Are they going to stick to doughnuts?

Ponnuru: Less than half of what they do is doughnuts. Their growth has been in product innovation. A lot of people love [Federal’s] chicken. Their chicken sandwich rivals the best of them. We think they are going to be able to operate in a much larger, chicken-focused, fast-casual market.

Right now, all 11 Federal stores are company-owned. But we believe it lends itself to franchising. I followed these guys for years — Cook and Solomonov have Zahav (in Center City, 2019 James Beard Award winner for “Best Restaurant in the Country”), Laser Wolf (Philly and Brooklyn), Dizengoff (hummus, two Philly stores), Goldie (falafel and vegan shakes, three Philly stores). Federal was their concept that had the most locations. They felt it could be the one to scale the most and fastest. A concept you could envision being successful in a wide geographic area.

Q: NewSpring typically invests in a company with partners, and keeps the founders on board. Aren’t you making a big bet that you’ll be able to keep them running things?

Sugrue: We’re business builders, and we have empathy and respect for these founders. Our cofounder, Mike [DiPiano], a lot of what he does is counseling CEOs. It’s a lonely job being CEO. You have to always be the smartest guy in the room. You have to get all the answers. With the door shut, with a guy like Mike who has been there many times, you can bounce ideas.

That’s what attracted me to NewSpring, supporting these CEOS, helping to realize their vision.