PE-backed pubs and restaurants looking for silver linings

The UK's pubs and restaurants were some of the first assets to be hit by the full scope of the coronavirus crisis, when Boris Johnson instructed various retail businesses to close indefinitely on 20 March 2020.

The sector has already seen its first major casualty. Restaurant chain Carluccio's announced it had gone into administration on 30 March, blaming challenging trading conditions exacerbated by the coronavirus pandemic.

In the last decade, the UK's casual dining sector has seen significant interest from PE. The number of buyouts in the restaurants and bars sector reached a peak of 11 in 2014, with many recognisable brands such as Pizza Express, Côte Restaurants and TGI Fridays being acquired.

PE buyouts and growth capital deals in UK pubs & restaurants

Yet, having enjoyed considerable backing for a sustained period, the sector has more recently come across challenging times due to oversupply and changing consumer behaviours, as well as macroeconomic and political headwinds. Prior to the coronavirus crisis, margins were notably squeezed by the introduction of the national living wage, decreasing consumer confidence and business rate hikes, particularly in London. Chains that expanded rapidly under their PE owners through aggressive roll-out strategies were left particularly vulnerable by this combination of factors.

Casualties in the PE-backed restaurants sector included the closure of 94 sites of TPG Capital's Prezzo in 2018. That year, burger chain Byron also announced it was to close up to 20 of its 67 restaurants as part of a restructuring deal that saw Three Hills Capital Partners (THCP) buying half of Hutton Collins' stake in the company.

In the current circumstances, the prospects of the sector have deteriorated even further, with the revenues of many UK businesses reaching zero.

Time for reinvention
So far, private-equity-backed pubs and restaurants have taken measures to mitigate the situation, closing sites, furloughing staff and shifting to takeaway strategies. "With Rosa's Thai we've been fortunate," says Trispan operating partner Robin Rowland about the firm's portfolio company, a chain of cafes that sells Thai food. "More than a third of revenue was from takeaway. We identified the sites that were best suited to remaining open and those sites are trading very well."

Other companies are also attempting to preserve revenue generation. Risk Capital Partners-backed Small Batch Coffee is now delivering its coffee. Meanwhile, Mayfair Equity Partners-backed Yo! Sushi has continued to advertise its branded line of products, which is available in supermarkets.

THCP-backed Byron shifted to a Deliveroo-only business model prior to the nationwide closures; however, on 23 March, the company closed these operations completely. "We don't believe it's right to ask our employees to travel into work," the company said in a statement.

Meanwhile, some PE-backed food businesses have also joined the efforts to assist the NHS as it combats the crisis, including Trispan-backed Rosa's Thai. Rowland says: "We're working with the NHS and key workers to make sure they're getting high discounts and we're following government guidance on social distancing."

Encore Capital-backed Mildreds, a chain of vegetarian restaurants, has also committed to delivering 400 meals every week to London hospitals.

Restaurants, bars and pubs currently in portfolios

Asset	Deal date	PE backer	Business type
Mildreds	Aug 2019	Encore Capital	Vegan restaurants chain
Rosa's Thai Cafe	Jun 2018	TriSpan	Thai cafe chain
The Laine Pub Company	May 2018	Patron Capital, May Capital	Pubs and bars
Nightlight Leisure	Feb 2018	Lonsdale Capital Partners	Bars
Byron	Dec 2017	Three Hills Capital Partners	High-end burger restaurants
Burger King UK	Nov 2017	Bridgepoint	Fast-food
Punch Taverns	Feb 2017	Patron Capital	Pubs
Loungers	Dec 2016	Lion Capital	Café-bar chain
Koh Group; Buenos Aires Argentine Steakhouse	Nov 2016	Alcuin Capital	Restaurants
The Liberation Group	Jul 2016	Caledonia Investments	Pubs, bars, breweries and restaurants
Seafood Pub Company	Jul 2016	Penta Capital Partners	Restaurants and pubs
New World Pubco	Jun 2016	Graphite Capital	Pubs
Le Bistrot Pierre	Dec 2015	Living Bridge	Chain of French-style bistros
Small Batch Coffee	Nov 2015	Risk Capital Partners	Coffee shops
Yo! Sushi	Nov 2015	Mayfair Equity Partners	Sushi restaurants chain
Côte Restaurants	Jul 2015	BC Partners	Chain of French-style bistros
The Groucho Club	Jun 2015	Alcuin Capital	Private members club
The Alchemist	May 2015	Palatine Private Equity	Restaurants
Azzurri (ASK, Zizzi, Coco di Mama)	Dec 2014	Bridgepoint	Italian restaurants chains
TGI Fridays	Dec 2014	Electra Partners	US-style restaurants chain
Prezzo	Nov 2014	TPG Capital	Italian restaurants chains
Roadchef	Sep 2014	Antin Infrastructure Partners	Motorway service areas
Pizza Express	Jul 2014	Hony Capital	Pizza restaurants chain
Amber Taverns	Jun 2014	MaxCap Partners	Pubs and bars
Gusto Restaurant and Bar	Apr 2014	Palatine Private Equity	Italian restaurants chains
Hawksmoor	Jul 2013	Graphite Capital	Steakhouse chain
Drake & Morgan	Apr 2013	Bowmark Capital	Restaurants and bars
D&D London	Apr 2013	LDC	Restaurants chain

Source: Unquote Data

Help needed
When it comes to mitigating the ongoing impact of the lockdown, the government's pause on business rates and the offer to pay 80% of wages for furloughed employees has been welcomed by investors and management teams alike – but some doubt the efficacy of the measures.

James Knott, a director at Lonsdale Capital Partners, which owns a stake in cocktail bar Simmons, says: "There are too many variables in the implementation of the government funding. We don't have clarity on what the banks are looking for from businesses and there's no uniform approach. Lots of them were burnt in the global financial crisis and don't want to take on too much exposure, and hence are reluctant to lend."

Many organisations have indeed reported that banks have refused them emergency loans, according to the BBC.

Another area that investors have highlighted as problematic is the government's resistance to implement stronger measures on rent holiday. "This is a major issue right now that the government needs to help solve. We are all expecting some news in the coming days," says THCP managing partner Mauro Moretti.

On 23 March, government departments announced a ban on evictions for commercial tenants that miss rent payments, which has led to confusion for some businesses. Says Rowland: "The current rent moratorium in place will just lead us to a long difficult conversation with landlords, who clearly have to protect their own income. It would be great to get guidance or support from the government."

Extra clout
Dealing with landlords, as well as lenders, could be one area where having a private equity backer could be beneficial, though. A partner that is both experienced in negotiations and financially committed to the success of the company can assuage the fears of lenders and landlords alike.

Knott says: "We've been lucky in that our landlords have so far been very sensible, and our lender OakNorth has been very commercial in dealing with the situation, bearing in mind we are not highly leveraged."

"We're very pleased with our initial reaction from Santander," says Rowland, "but bankers are going to stay with businesses that are bankable. The devil is in the detail and the government is going to be important in keeping the banks on track."

Some market participants have told Unquote that they would be willing to provide fresh equity to portfolio companies on a case-by-case basis where necessary.

Nevertheless, investors are expecting at least another two quarters of damage from the coronavirus situation. Knott says: "We're planning for normality to resume in September, assuming there's no second wave."

However, Trispan's Rowland cautions against underestimating the challenge of reopening once the situation stabilises. "It's not like flicking a switch; and, while closed, you have to make sure you remain relevant to your employees and your customers."

To that end, PE-backed restaurants such as Yo! Sushi, TPG Capital-backed Prezzo and Rosa's Thai have all been active in posting food-related content on social media.

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• Topics
• Consumer
• UK / Ireland
• coronavirus