March 10th, 2016

Private Equity's Restaurant Feast Goes On...For Now

By Kate Palmer, The Telegraph

Private Equity's Restaurant Feast Goes On...For Now
The Alchemist, an upmarket cocktail chain with private equity backing proves buyout firms haven't had their fill of the restaurant sector yet - with deal-making expected to keep pace this year

It's a mid-week afternoon but The Alchemist is already full of City workers taking in the spectacle: bartenders mixing drinks with dry ice that look more suited to a scientist's lab than a cocktail chain.

"Smoke and mirrors," says Simon Potts, the restaurant's boss. "We very much hold on to an identity as something different and independent - not your usual franchise."

The upmarket cocktail chain was first opened in Manchester in 2010 by former mixologist Tim Bacon and leisure entrepreneur Jeremy Roberts, and has since spread to four more locations.

But it's now received around £18m in private equity backing to fund ambitious expansion plans. It's a well-trodden path for buyout firms: take over a restaurant with a few locations - often at a lofty valuation - then bring in a new management team and multiply it again and again.

The Alchemist was bought for £13m last year by Palatine Private Equity. That pales in comparison to the £250m buyout of Côte, the French-style bistro chain, two months later.

"Multiples have gone up over the past few years, so the pressure is on to a find a strong, cash-generative business and grow it."
Gary Tipper, Palatine Private Equity
But the idea is the same. Private equity giant BC Partners reckons there is scope to triple Côte's existing 65 locations. Private equity houses are feasting on the sector as data show eating out is increasing 4pc year on year.

Byron Burger, healthy takeaway outfit Leon and Thai restaurant chain Busaba Eathai are all former start-ups that have recently announced expansion plans funded by their backers.

But while its financial firepower is highly attractive to a small business, the private equity model can clash with the ideas of founders.

One owner to shun buyout firms is James Watt, who co-founded the renegade beer company Brewdog in 2007 with Martin Dickie, and has since delivered break-neck growth.

Private Equity's Restaurant Feast Goes On...For Now

The Scottish-based brewery now has 44 pubs across the UK but Mr Watt insists his company won't turn into a "bland corporate beer conglomerate".

"If your company's at the mercy of venture capitalists, profit is king," says Mr Watt, who has turned to crowdfunding. He says £13m has been raised through the company's hugely popular Equity for Punks scheme. In April last year, the company issued more than 500,000 shares in a bid to raise £25m in growth capital.

"Well-known Michelin-starred restaurants in London are harder to replicate. It doesn't matter who the chef is if they're making gourmet burgers - but it makes a big difference at Quaglino's."
Ali Naqvi, Peel Hunt
Yet many restaurants without private equity backing are struggling. Some 1,300 restaurants went bust in 2015. "Private equity investment is making it harder for independent businesses to compete," says Steve Ramsbottom, an insolvency partner at accountancy firm Moore Stephens.

Even celebrity-backed outfits can struggle to attract diners. Marco Pierre White's four pubs went into administration last year. Analysts argue that anything that's not mass-market - think of the Cereal Café in Shoreditch, east London - can be too bizarre to roll out on a grander scale.

"Private equity loves a cookie-cutter model," says Ali Naqvi of Peel Hunt, a leisure industry analyst. "The proposition needs to be fairly vanilla, where you can replicate it. If you're independent that's harder to do."

Private Equity's Restaurant Feast Goes On...For Now
Gary Keely and his brother Alan Keely, who co-founded the Cereal Killer Cafe

Opulent cuisine is also off the menu. D&D, the restaurant giant behind Quaglino's, failed to float last year after its owners failed to raise sufficient funds.

"Well-known Michelin-starred restaurants in London are harder to replicate," says Mr Naqvi. "It doesn't matter who the chef is if they're making gourmet burgers but it makes a big difference at Quaglino's."

In the past 18 months Côte, Gaucho, Byron, Ask and Zizzi, Strada, Prezzo, Pizza Express, Las Iguanas, La Tasca, The Real Greek and Yo! Sushi have all changed hands. Ed's Easy Diner, the Fifties-style burger chain was also on the block but decided against a sale despite reportedly receiving "several offers".

But fund managers are already calling the top of the market. Reports are that prices have reached 12 times a restaurant's earnings before interest, taxes and amortisation, meaning firms are paying prices that have rarely been seen since the financial crisis.

Gary Tipper, managing partner at Manchester-based Palatine, says: "Multiples have gone up over the past few years, so the pressure is on to a find a strong, cash-generative business and grow it."

And there are dangers. The spectre of escalating rents and a rise in staff wages are likely to hit restaurant chains on private equity firms' books.

Mr Potts, from The Alchemist, says: "The wage rise is happening, and we're going to have to meet that challenge."

 

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