Byron disaster puts PE on the grill

Kenny Wastell
25 August 2016

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The arrest of numerous staff at restaurant chain Byron Hamburgers has brought about an angry backlash and shone the spotlight on its private equity owners. Kenny Wastell considers the effect on the asset class's public image

Private equity has had its fair share of negative publicity throughout the years. In September 2012, August Equity found itself at the centre of controversy when an undercover reporter from broadcaster ITV exposed alarming practices in portfolio company Funeral Services Partnership (FSP). The documentary showed FSP employees making offensive remarks about the deceased under their care, as well as intentionally ignoring the instructions of bereaved families. More recently, Terra Firma-owned elderly care home business Four Seasons Health Care made headlines last year when the Care Inspectorate watchdog found a resident had been the subject of "highly inappropriate" and "unacceptable" treatment from members of staff.

In July 2016, Hutton Collins became the latest GP to find itself in the firing line when 35 employees at casual dining chain and portfolio company Byron Hamburgers were arrested on suspicion of breaching immigration laws. The company had reportedly instructed kitchen staff to report for a training exercise that transpired to be a joint operation with the UK Home Office, whose officers swooped mid-meeting to remove suspects.

The employees in question used highly sophisticated forgeries that took expert detection by professional immigration teams to identify" – Byron spokesperson

In the aftermath, anger initially focused on Byron's active role in the procedure: two London restaurants were forced to temporarily close after a group of activists released locusts and cockroaches in the premises. However, with the spotlight fixed firmly on the business, it was not long until media attention turned to its structure and tax affairs. Within a week of the Home Office story breaking, national publications picked up on a report by online publication Buzzfeed focusing on Byron's tax affairs. In particular, the report highlighted what appears to be a portfolio company loan made by an offshore entity to minimise corporate tax payments.

Byron's role in the Home Office action was, in most senses, unavoidable. As the company itself stated in a public response to the events, it had a legal obligation to cooperate fully and act upon the requests put upon them by the immigration department. Furthermore, as with any business, it must do everything possible to ensure it complies with immigration and asylum law. However, much of the public outcry was due to the very public manner in which the raids took place and Byron's direct involvement in coordinating the operation rather than strict adherence to the law.

In the aftermath of the events unquote" reached out to Hutton Collins for comment. A spokesperson for the GP declined to comment, stating the matter was exclusively related to Byron itself. A Byron spokesperson said: "We have processes in place to check that the people we employ are legally allowed to work in the UK. We've reviewed those processes with the Home Office and they have confirmed that we're conducting all the appropriate checks. The employees in question used highly sophisticated forgeries that took expert detection by professional immigration teams to identify."

Quite the pickle
It is, to a certain extent, unfortunate that Byron and its private equity owners found themselves in the position they did. It is also predictable that an incident of this sort led to empathy-induced retribution, which itself can often bring renewed scrutiny of the PE ownership model. That said, there is nothing illegal, nor anything particularly unusual, about Byron's tax affairs. So long as such possibilities exist, fund managers will look to maximise returns within the realms of the legal system, thus boosting profits for LPs – many of which pass those profits on to the public in the form of pensions or insurance payouts.

However, it is harder to overlook the apparent governance failure that led to Byron employing ineligible workers, particularly given its occurrence across multiple locations. In addition to the public relations fallout from the episode, Hutton Collins might be well advised to carry out extensive operational reviews of the business to ensure there can be no repeat of any similar incidents.

Private equity as a whole has made positive strides to improve its public image in recent years, particularly through an increasing focus on environmental, social and corporate governance (ESG). Certainly, failures to address environmental and social concerns are likely to result in a media storm. Yet the incident once again proves negative publicity can also result from failings in governance – and when a portfolio company finds itself to be the target of a media backlash, its tax-efficient strategies will inevitably be scrutinised and criticised.

Byron's example shows that private equity simply cannot afford publicised operational failures if the industry does not want to give free ammunition to those that continue to paint it as the villain.