A big test for private equity

Gareth Whiley, a partner at private equity firm Silverfleet Capital and non-executive director of Paramount Restaurants, insists his industry won't abandon the restaurants it is backing despite the economic downturn

Last year saw unprecedented interest by private equity in the restaurant industry, but the credit crunch, consumer slowdown, tumbling share prices, stuttering concept rollouts, food inflation and a harder banking market have made for much tougher times in 2008.

This all begs the question: how are private equity owners likely to react to the changing conditions?

Clearly, for some private equity houses, the changing conditions will represent an opportunity. With a fall in the prices paid for commercial property, property deals will become more attractive and there will be greater availability.

And, in any downturn, strong concepts will win market share. Any operation or brand that is perceived by the consumer as offering good value for money will continue to do well, a trend that can be seen in hotels and pubs as well as restaurants.

However, over-leveraged, over-rented businesses will struggle to make the most of the opportunity, and some will battle to survive. Banks are likely to get increasingly nervous about the restaurant sector and might even withdraw from lending in the short term. Certainly, any business that needs extra leverage will fight to secure it unless it has a strong track record. In times like these there is also a "flight to quality" - the action of investors moving their capital away from riskier investments to the safest-possible investment vehicles.

The falling numbers of consumers hitting the high street will affect everyone to some degree, and businesses will need to react swiftly and decisively to succeed.

Private equity ownership is ideally suited to this situation, with short lines of communication a focus on the medium term rather than short-term reporting of results and the ability to fund growth through equity investment if the returns are there.

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