How easy or difficult is it currently for restaurants to raise money?


There is a lot of interest from people gener- ally at the moment to invest in restaurants in all parts of the capital structure. Banks are lending to restaurants, the bond market is lending to restaurants, and there are inter- ested equity parties who want to own restau- rants and provide equity capital. Right now, I think it is a pretty good time for restaurants to be raising capital.


How does the situation now compare with a year or two ago?


It has been that way for some time. We invested in Wagamama back in 2011 and there was a lot of interest, and in the past year or so there have been a lot of restaurant chains that have traded. We also invested in Byron last year. Over the last couple of years people have


caught onto the fact that every week approxi- mately 30 pubs close in the UK, that the pop- ulation is increasing and that the population is going to go somewhere. They are increas- ingly spending more time in coffee shops, gastropubs with good food offerings and casual-dining restaurant chains, as opposed to just going to a more wet-led pub.


Are we likely to see more of the type of private equity deals that you have mentioned in the coming months? PizzaExpress has just completed. My under- standing is that Ask and Zizzi are going to be on the market at some point so I don’t see why not. There is also interest in the vari- ous Tragus assets like Strada and there were press rumours of one or two others. We have talked about the backdrop that is creating the demand for restaurants and the market is big enough. The branded segment of the market has been growing straight through the recession, while the unbranded segment didn’t do so well. So, if there are concepts out there where the average spend per head isn’t too high and you are generating decent growth then there could be a lot of interest.


As an investor, what do you look for in a restaurant business when you are considering making an investment? My rule of thumb is that it has got to be dif- ferentiated in some way, whether it is Waga- mama, which really owns its niche, or maybe the locations, or whatever it is. I prefer not to be at the high average spend end of the mar- ket as I tend to think a lower average spend is a more defensible place to be. So I look for higher cover turns, lower average spend, gen- erating a healthy gross profit margin with a concept that is replicable and that generates a good return on capital for its equity investors. You build all those things together and that is a recipe for an attractive investment.


www.thecaterer.com


“I look for higher cover turns, lower average spend, generating a healthy gross profit margin with a concept that is replicable and that generates a good return on capital for its equity investors”


When you invest in a business, do you look to make specific changes? Are there things you routinely do when you become involved in the business? We initially identify good concepts with man- agement teams that we can back. The most important thing is the management. I pre- fer not to change anything; I would prefer to have a great concept that is being executed by a great management team that needs capital to expand and possibly some of our expertise.


Is there a typical return you look to generate when you invest and how long does it take to realise that return? I would like to generate equity returns as high as possible for our investors given mar- ket conditions and the growth potential of a given concept. That said, when we are sitting at board level and approving new sites, we want to see sites that have on average around a 30% simple return on capital.


And how long would you expect it to take to hold a given investment?


I think a five-year hold is not unreasonable. The truth is that all these private equity fund structures require you to sell at some point. But I really like what the shareholders of Patis- serie Valerie just did with that business. I do not believe they took much money out. These roll-out concepts are great businesses, gener- ating high returns on capital and I would love to hold them forever but we have fund struc- tures that require an exit at some point.


You mentioned the number of closures in the pub market and the fact that the dining-out market is changing, but we have also seen a rise in the number of food-led managed pubs as businesses have adapted to the changing demands of the consumer. How has this changed the eating out landscape? I think the market has changed a lot. That is partly due to so many pubs closing every week but also due to people travelling more,


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using social media more and being exposed to global cuisines and tastes. I think there was a trend that involved these gastropubs for a while and Rupert Clevely with Geron- imo Inns was one of the first ones to do that with scale. He and his wife [Jo Clevely] are clearly a great example of people who came early to the market to innovate in the pub sector and I think there will be others who build on that. People fundamentally like pubs and want to go to pubs. Pubs are cosy and nice to go to but they are a lot nicer to go to when they have more capex invested in them and when the food is of a higher standard.


What do you make of these alternative methods of raising finance like BrewDog with its Equity for Punks scheme or Chilango with the ‘burrito bond’ that it issued? Is there a potential shift to businesses funding themselves in different ways? I am not too familiar with the exact schemes, however, I understand that some small con- cepts have raised funds via crowdfunding, which I am not in favour of. From an inves- tor point of view, I think a very attractive way to invest in start-ups is through the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS). I know there are a lot of young, burgeoning restaurant chains that have raised capital in this sort of tax-efficient way for investors.


I think crowdfunding, at what are very high valuations, could potentially be very risky from a less-experienced investor’s point of view. From a start-up or early stage point of view, I would be much more in favour of EIS or SEIS investment schemes to get things going and then after that, once busi- nesses are cashflow positive, they can look at raising some seed private equity capital.


Why don’t we see more publicly listed restaurant companies in this country? Will that change in the future? Yes, I think so. In the US, you have branded chains that are public but then you also have master franchise companies that might run 200 McDonald’s and 200 Subway stores and they float. Over here, we’ve got TRG and Prezzo and Patisserie Valerie and I think there is probably quite a lot of demand from public equity investors to invest in these. Fundamentally, the branded restaurant businesses have been growing at a pace that has been outstripping GDP for quite some time and that is going to be attrac- tive for public equity investors. There is also the potential of some of these branded chains expanding on an international level and that may be attractive for public equity investors as well.


September 2014 | Restaurant Insight Report


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