Do food & drink and restaurant & hotel investments deliver?

Food & drink
Historically, investments in the luxury food and drinks market have generated good returns, therefore becoming a GP favourite. However, a small number of private equity-backed companies have flopped after receiving funding, despite a promising start.

West Midlands Enterprise-backed Malagasy, a UK-based luxury Madagascan chocolate company, went into administration in August 2010. Its investor's stake was written off, despite the company winning a number of awards and being stocked in Fortnum & Mason and Waitrose prior to its troubles. The company's unique "Equitrade" policy made it stand out from the crowd and fell neatly into step with the booming fairtrade economy. Unfortunately, that wasn't enough to save the young business.

The luxury crisp market, however, has enjoyed a resilient relationship with private equity. Herefordshire-based, high-end crisp maker Tyrrells was sold by Langholm Capital to Investcorp in August for £100m, proving the industry's love of upmarket snacks is still going strong.

Langholm acquired Tyrrells in April 2008 for an estimated £30m, according to unquote" data. At the time, the company employed slightly more than 100 staff and recorded turnover of £13m. By August this year, Tyrrells employed 270 staff and generated sales of £100m. Its success has been attributed jointly to its prominent position in the UK market and its increasing international presence. The company now generates 20% of its turnover in overseas markets, including Germany, France, the Netherlands and the US.

This success has been replicated in the drinks sector. In 2007, Piper Private Equity backed the management buyout of Cotswolds-based Bottlegreen, a high-end cordial, pressé and tonic maker. The deal saw Piper inject £5m into the business in exchange for a majority stake, according to unquote" data.

Four years later, Bottlegreen's turnover had grown by almost 75%, while its EBIT increased by 2.5x. The company was sold to Irish drinks group SHS in May 2011, reaping a 5x return for Piper. 

Restaurants & hotels
While casual dining and private equity go together like steak and chips, there is an element of uncertainty surrounding the industry's new-found love for high-end eateries. Private equity's success in casual dining boils down to a regimented, functional approach that, while effective at yielding impressive returns, tends to push the uniqueness of individual sites to the bottom of the agenda.

In the case of luxury restaurants, a charming, one-off "personality" is a crucial element of a successful high-end establishment. The methods used by GPs to cause substantial growth in the casual dining market may not necessarily yield the same successful outcome in its "grown-up" counterpart.

London-based Graphite Capital holds several luxury eateries under its belt, which have been gathered in quick succession. Last year the firm paid £21m for Rex Restaurants, the umbrella company of high-end London restaurants The Wolseley and The Delaunay. The eateries were established by renowned restaurateurs Chris Corbin and Jeremy King, the men behind other famous restaurants such as the Ivy and Le Caprice.

Since Graphite's investment little more than a year ago, Rex has opened a further two restaurants: Brasserie Zédel, a Parisian brasserie-cum-American diner with a live cabaret venue; and Colbert, a brasserie situated in Sloane Square.

More recently, the GP acquired London-based, high-end steakhouse group Hawksmoor for an estimated £35-40m. Prior to Graphite's investment, the business had been growing at a quick place. Founded in 2006, Hawksmoor already had four restaurants under its belt and was generating revenues of £18m by the time Graphite led its management buyout in July.

But industry commentators have voiced concerns over Hawksmoor's future success and the conflicts that could arise between its private equity backers and its management. While the business needs to grow substantially to become truly profitable – and this will be the main focus of its investor – it may risk turning into another cookie-cutter restaurant in the process. If there is a Hawksmoor in every city, its upscale image and appeal will surely fade.

LDC-backed D&D London has overcome this dilemma by operating a collection of individual, high-end restaurants. The company claims to own "30 of the most famous restaurants in London, Leeds, Paris, Istanbul, New York and Tokyo", but each establishment is designed uniquely and no two share the same name. Rather than forming a chain, D&D has provided a successful smörgåsbord of unique eateries such as the Coq d'Argent in the City of London, Quaglino's in Mayfair, Guastavino's in New York, Botanica in Tokyo and Alcazar in Paris.

LDC backed the company earlier this year in a £50m management buyout. The restaurant group was previously sheltered under an iconic British name, Conran, until September 2006 when Des Gunewardena and David Loewi bought the company alongside Caird Capital.

Private equity-backed expansions into the hotel industry is another emerging trend. A fair few high-end restaurants have ventured into the luxury boutique hotel market either not long before or after a buyout. By covering both prominent bases in the leisure and hospitality industry, these companies are replicating their success in restaurants into an equally high-value sector and, in doing so, allowing for substantial growth without flooding an already crowded market.

Graphite's Rex is opening The Beaumont next year, a five-star boutique hotel on Balderton Street in Mayfair. Likewise, last year D&D opened the £50m, 80-room South Place, a luxury boutique hotel in the City of London, which featured on Condé Nast's 2013 hotlist of the best new hotels in the world – perhaps proving the private equity industry has cultivated a keen eye for sound portfolio choices in this relatively nascent investment sector.

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• Topics
• Consumer
• Langholm Capital Partners LLP
• Investcorp
• Piper Private Equity
• Graphite Capital
• LDC
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