Finding finance in a post-Brexit, post-Covid landscape

Paul Campbell, owner of Hill Capital Partners – whose investments include Hawksmoor, Vinoteca and Blacklock, says: "The industry has been shaken up and we've not seen so much change, in-play businesses, and so many opportunities like this before. My businesses are not only optimistic about expanding but they are equipped to do so. And there are also many new businesses looking to get going."

But despite this bullishness, there are likely to be a few obstacles to overcome before we have an environment that is conducive to widespread deal-making across the industry. Tom Cox, partner at FRP Advisory, says: "It's a bit of a no-man's land at the moment, with lots of debt both on and off balance sheets and a focus on how to reset the capital structures ready for when the world opens up."

He highlights that debt on restaurant balance sheets has quadrupled since 2008, partly on the back of private equity firms funding the extravagant expansion strategies of high street chains. "A lot of these companies have recently loaded up with even more [government-related] debt. You can't sort out the problem of having too much debt by taking on more debt," says Cox.

Companies need to look for new sources of capital, including equity or institutional capital such as quasi equity and family offices, which invest the money on behalf of wealthy families. "We're seeing non-classic sources of finance like family offices and pseudo structured capital (mixing debt and equity) as it's so difficult, albeit not impossible, to get pure debt finance in F&B," he says.

Boparan falls into the camp of family-owned and well-resourced and has been able to pick up low-priced deals like Carluccio's, which it acquired for the knockdown price of £3.4m. Mark Crowther, chairman of Curious Brewery and Portobello Brewery, points to the equally opportunistic purchase of Curious Brewery by Luke Johnson for £5m that involved no debt in its financing. It is being used as the base on which he intends to add other brewery acquisitions.

Despite this deal, Crowther does not feel there are many opportunities in the market right now – particularly in the pubs category. "There has been lots of interest and fundraisings from private equity to buy pubs on cheap deals, but there has been no evidence that prices have moved down at all. Some prices have gone the other way because there has been so much money chasing few deals. While it has been painful for operators they have had a lot of support on rent, rates and furlough," he says.

There has been lots of interest and fundraisings from private equity to buy pubs on cheap deals, but there has been no evidence that prices have moved down at all

The high-profile Oaktree-backed fund raising by Rooney Anand armed his RedCat vehicle with £500m with which to plunder the pub sector and buy assets on the cheap, but it has not materialised. So far he has only acquired 42 pubs from Stonegate for an undisclosed sum.

"There has been a dearth of opportunities but I hope that by the end of the summer there will be more when the markets open up," says Crowther.

There is also scant amount of activity – especially from private equity – in the restaurant sector, which suffers from being an unappealing investment case, according to Douglas Jack, advisory board at Growthdeck and leisure analyst at Peel Hunt, who says many of the 5,000 outlets that have closed in recent years have been private equity-backed: "They've done a lot of deals with restaurants but a lot of private equity houses have walked away from them. These investors are now more likely to be looking at pubs instead."

Crowther says a driver for greater activity in the market could be the banks: "They have not been putting any businesses under but in six to 12 months' time, they'll be saying some are over-leveraged. They'll then be forced into selling some good stuff because selling off the tail does not generate much value. If you take out some of the better assets then it can move the dial," he suggests.

Credit where it's due

Phil Reynolds, partner at FRP Advisory, points to the extended rent moratorium as putting a "stopper on the number of sites coming to market". However, like Crowther he expects opportunities to arise. Pre-Covid-19 restaurant failures resulted in administrators typically selling on 50% of the top-performing sites to a purchaser, whereas at present it is more like 30%-40%, which means that 10%-20% of what are likely to be reasonable-performing units in normal circumstances are becoming available for opportunistic buyers.

Cox agrees some great brands, including a number underpinned by freeholds, will become available because lenders' approach to credit in the sector has been stymied by Covid-19: "We'll see fantastic businesses come to market because they will never be able to pay off the levels of debt they've built up or will struggle unless deals can be restructured. A lot of the government loans have effectively stopped businesses investing in new assets because they have to pay off their loans first before they can spend elsewhere."

We'll see fantastic businesses come to market because they will never be able to pay off their levels of debt they've built up or will struggle unless deals can be restructured

Mike Saul, head of hospitality and leisure at Barclays Corporate Banking, suggests there are certainly question marks over how some of the credit lines of companies will play out. "You need a strong partnership with the banks. We're seeing some movement here, with some companies looking for another banking partner. We're open for business and so we get plenty of interest."

With regards to clients coming to his team with acquisitions that need funding, he says "we're open to assess what's put our way". "The normal canons of lending apply – with sustainable cash flow, including debt repayments – being the operative words now being used by banks," explains Saul.

Steven Kenee, chief investment officer at Oakman Group, recognises this scenario and says it is sensible that the banks do not take risks and that the bullishness remains in the hands of the companies. "They talk a good story but there is more caution. They'll lend to businesses that do not need it too much and those with no debt. They will come back but they are slightly behind the curve," he explains.

Alternative funding sources

Against this backdrop, and the need to focus on managing the move out of Covid-19, the team behind ETM Group have recently set up Maven Leisure, which has just raised £4.3m via Growthdeck.

Jack says: "With existing quoted operators the banks and institutional investors have been supportive, but for many private businesses the banks expect debt repayments first. But many are cash-strapped. Therefore their focus is on debt reduction and not on growth. The ETM business will focus on coming out of Covid-19 but for its management team Maven is the new growth vehicle."

Oakman Group also looked to alternative types of funding for its planned growth strategy and went down the crowdfunding route.

"We wanted to open ownership up to customers. We advertised the fact they could invest in the pubs. At the time there were not many options but crowdfunding had been part of our strategy because as well as the investment funds you also get advocates," says Kenee.

The company had considered using one of the platforms – Crowdcube or Seedrs – but the fees and the fact Oakman already had a database of 180,000 customers who would be prime targets for the share offering suggested to Kenee that the company could handle the process in-house.

This decision cost the company a modest £50,000 to undertake, compared with more like £500,000 with a crowdfunding platform. It also enabled it to successfully raise £5.5m from almost 400 new investors. The first £5m of this was raised in only three months versus a predicted six months.

"It was like pushing on an open door. Our database consists of people in affluent locations and we know they like our pubs. It was therefore a very easy story to sell to them. We know that if they used to visit once a month then if they are a shareholder then they will come more often. Because we built the mechanism for the crowdfunding, we can replicate it for other future raisings," explains Kenee.

What undoubtedly helped Oakman is the success of its model of operating large premium inns and restaurants in appealing market towns housing lots of wealthy potential customers. Under any circumstances – regardless of a pandemic – there will always be businesses like Oakman that appeal to investors and others that don't so much.

Cox suggests: "There is a world of difference between old and new businesses. If people come to market [to raise funds] with a staid full-service restaurant, with high fixed costs and challenging lease situations, then it won't be successful. But there are some growth trends that are appealing, including delivery and businesses that use technology to engage with customers, which are attractive to investors."

This polarised view of the industry that has developed among operators is mirrored by the diverged views of the hospitality sector among investors, according to Campbell, who says: "Some investors have been burnt, so it's natural that if you've had a bad time in the sector and lost money you'll be shy for some time. But for those new investors with blank sheets of paper, they will see this as an amazing opportunity."

Maven Leisure Fundraising

To take advantage of the favourable conditions for acquiring London sites for new pubs, the founders of ETM Group have set up a new business and raised £4.3m via Growthdeck, which handles investments from 3,500 high-net-worth individuals.

Such investments are especially appealing to such individuals because of the tax advantages brought about by the Enterprise Investment Scheme (EIS) for investing in start-up businesses. Meanwhile, the ETM management has raised funds via an alternative route to the traditional banks.

Gary Robins, head of business development at Growthdeck, says: "We're like a mid-market private equity house that raises upwards of £500,000, mainly for growth companies and start-ups. Over the past year we've specialised in opportunities in the hospitality sector. We're keen because it has been hit so hard and the best operators will make hay. We go out and find the opportunities, which have included food delivery business Supper."

Maven plans to leverage its expertise from opening 13 successful outlets as ETM Group and use the funds raised via Growthdeck to open at least seven premium bars in central London.

Matching the lender to the investor

Ensuring there is alignment between the business and its investors is critical, and Steven Kenee, chief investment officer at Oakman Group, therefore suggests hospitality companies find a source or provider of capital with the same objectives as themselves across the various potential funding options including banks, private equity, family offices and crowdfunding.

"What do the lenders want and what do I want? Every lender and investor will have different requirements. We're fortunate at Oakman because I can spend my whole time doing Venn diagrams that show where the needs of both parties meet," he explains.

Kenee warns of the risks when failing to undertake such preparation: "If you don't find this alignment then the deal will likely fall apart. If you both pull in different directions then it will snap at some point. Be very wary and walk away from a deal if you have any issues. You have to be incredibly careful. It is hard work but it will be rewarded in the end. That's the approach we take."

For Oakman Group he says the decision to date has not been to go down the route of taking institutional money, such as private equity funding, because of the inevitability of "working to somebody else's time-line", where the likely objective is to buy, build and then sell the company, whereas the Oakman strategy is to create a dividend-paying business for the long-term.

Main image: 2019 PopTika/Shutterstock.com