From Failure to Phoenix

Article by Justin Urquhart Stewart
Director & Co-Founder at Regionally

Can we find any good news in the bad? Looking at the headlines over the past few days it would seem unlikely. Famous brand names seem to be going down like flies. From Byron Burgers (made infamous by George Osborne sending out for his late-night snack) to more familiar high street names such as Café Rouge and Bella Italia, the high street café restaurant and dining sector has been well and truly decimated.

However, although these most recent failures have been blamed on the pandemic, the sector was already having significant problems with a growing list of failures. Just remember Jamie Oliver’s Italian restaurants, and Carluccio’s, both of which had suffered financial troubles before the virus hit. This sector has unfortunately suffered from being the fad of the decade, for although lower cost eating out appealed to our consumer led economy, restaurants have traditionally been one of the riskiest businesses to invest in and the failure rate has been significantly over 50%.

One reason is the unreliability of previously trendy brands, which turn from haute couture to tank top in a matter of weeks. There is though, an underlying commonalty of risk below the surface for many of these businesses, and that is their style of investment and finance. This is often the world of Private Equity.

Private Equity companies have also become popular over the past two decades, and during that time have financed many retail business transactions. Within that, there have been many successes. However, much of this has glossed over not just the failures but the risks which seemingly many of the clients did not to fully appreciate.

Now please don’t get me wrong. There are Private Equity white knights in this sector doing the right thing, but there are also dark knights designing financial investments often for the benefit of themselves based on the risk and hard work of the company being invested in.

My main concern is the relatively short-term nature of Private Equity. The usual investment period is three years, although some will say five years. In my experience most who go to five years are those which they could not offload in three.

The model is simple: financing provided to restaurants which, in this instance, are often run and developed by talented chefs and restaurateurs trying to become successful entrepreneurs. They see access to investment as very exciting and a great opportunity- which it is. However, many don’t appreciate that three years is not a business cycle and is an incredibly short time span. In effect, shortly after the investment has started, many will have to start planning for their next investment partners almost immediately.