A recent article in the Corporate Financier highlighted the role of the UK leisure sector, specifically, the restaurant and bar sector in fuelling private equity firms during the recession. With between 13 and 22 M&A deals per annum in the sector since 2009, and the majority of these backed by private equity, the sector has been key over the past few years.
Why all the interest?
The statistics say it all – people are eating out more often and spending more as they do so. According to M&C Allegra FS, since the recession, spending in UK restaurants has gone up 39%. This resulted in the UK food service sector being valued at £46.6bn in 2014, with 2015 growth forecast between 1.1% and 3.2% according to Ten Live Group.
These numbers coupled with past success in the sector continue to attract attention from the private equity sector. Their approach has been quite simple:
- Find an established operator in the sector with a concept that has been proven over a handful of sites.
- Build on their current success by rolling out further sites, building the portfolio.
- Sell the company on, usually to another private equity firm, making a hefty profit.
This approach has brought success for some, and continues to attract attention. A Financial Times article noted this trend and highlighted comments from Peter Hemington, corporate financier at BDO, “Restaurant groups, with their cookie cutter scalability and strong cash-generation, work well for private equity. Chains with consumer appeal and good management can grow well enough to justify today’s double-digit multiples.”
From the ground up
While private equity is looking at established brands, some investors are supporting new businesses backed by experienced management teams in the hope of getting their piece of the expanding Leisure and Hospitality sector pie. Some of these companies are eligible for the Enterprise Investment Scheme (EIS), providing investors with 30% tax relief from the UK Government in return for the added risk of investing in new companies.
One such offer is the Imbiba Leisure EIS Fund. The Imbiba Partnership have been in the Leisure sector for over 18 years and has exited from 10 EIS businesses. Their most recent exit was the sale of Drake & Morgan to Bowmark Capital, generating a return of 5.7x for investors. Their buy, build, and exit strategy is perfectly aligned with private equity interests and their track record speaks for itself. With personal investment in all of their ventures and a management incentive hurdle rate of £1.50, the team is aligned with the interest of investors and is driven to create quality, attractive bars and restaurants that can then be sold with a return for investors.
Ceru Restaurants is another EIS investment opportunity in the UK Leisure sector and with a concept that has been proven by an expanded schedule of contracted pop up sites in London and festivals across the UK. Stephen Gee, ex-chairman of a number of restaurant groups including Gaucho and Iberica, is Chairman of Ceru. Having co-founded Carluccio’s in 1998, Stephen has overseen expansion to 100 restaurants in the UK and 15 overseas, he is arguably one of the best known operators in the UK dining market. Stephen is working with founder Barry Hilton, a seasoned operator who has been involved with Spice Inns, Black & Blue and Yalla Yalla, to roll out their Eastern Mediterranean casual dining concept to permanent sites.
New forms of investment such as crowd funding have generated interest and investment from people who may not have previously engaged in the sector. From craft beer to online grocery platforms, people are finding new and interesting projects in which to invest.
A key factor in decision making is due diligence. If one is investing with the intention of financial returns, it is prudent to do your homework and ensure you are investing in a company that is also focusing on exit. Our article on exit strategies outlines 5 things an investor could keep in mind when looking at an investment to ensure their exit focus is aligned with that of the investee company.
If you are interested in the Enterprise Investment Scheme and/or the UK Leisure and Hospitality sector in the UK, you are welcome to get in touch with us.
Please note the tax treatment of the investments depends on the individual circumstances of each investor and may be subject to change in future. The availability of tax reliefs depends on the Company invested in maintaining its qualifying status. Enterprise Investment Partners does not provide tax advice. We recommend you seek independent advice before investing.