Apollo’s bid for The Restaurant Group has “fired the starting pistol” on further deals in the sector, corporate finance specialist Graeme Smith has predicted.
The managing director of AlixPartners suggested with a flurry of recent deals, a high volume of deal activity could be seen heading into 2024.
Speaking at MCA’s Restaurant Conference, Smith said a big player like Apollo, which has $512bn of assets under management, had the power to create a ‘fear of missing out’ among other private equity firms.
“When you get a name as big as Apollo making a big move into the sector, that can only be positive for sector investment,” he said.
“It makes other PE firms think what are we missing here? People don’t want to be too late.”
He suggested the move had led to a recovery in values of public-listed leasehold bars and restaurants, which are up more than 40% in value year-on-year.
Improved profitability has also boosted valuations in the sector, which is important for investor sentiment.
“At the point when margins are falling, everyone’s afraid of catching a falling knife,” Smith said.
“When you get back into margin expansion, you move into a period of fear of missing out. People don’t want to move too slowly, because if they wait longer, it might be more expensive to invest in.”
Particularly in leasehold bars and restaurants, which have struggled with rent and wages during the downturn, there is potential for a bigger recovery as market conditions improve.
“When revenues are falling, that really hurts, and it drops through to bottom line very quickly.
“But when it starts growing again, you get a big boost on the upside as well.”
Meanwhile with interest rates driving the cost of capital upwards, businesses have to demonstrate a sharp focus on “growth, growth, growth”.
“If you can demonstrate your top line and profitability is in growth, it enables you to keep pace with inflation and the cost of capital.
“That is really colouring views on all investment decisions at the moment - what is going to drive that growth.”
Small businesses, with lots of whitespace for growth, have remained a consistently appealing prospect in recent years.
These are business which resonate with their customers, and have low hanging fruit in terms of obvious locations in places with similar customers, Smith said.
Franchising has also become popular due to the lower capital investment requited to expand.
International expansion is an increasingly appealing consideration for businesses at an earlier stage in their journey.
Smith said recovery was not being spread evenly, with polarisation between winners and losers, and the independent sector contracting.
Customer behaviours have shifted, with newer business formed in last five-ten years better able to adapt to these new tastes, while larger business have struggled with evolving consumer dynamics.
Still, with a healthy volume of deals in the second half of 2023, Smith said Alix is optimistic this trajectory will continue.
He predicted exits for longer held investments, with shareholders who have seen businesses through difficult times looking for a liquidity event.
There will be continued challenges around refinancing however, and with debt maturing some business may need to be sold, he said.
Meanwhile trade buyers will continue strategic consolidation, as seen with the likes of Big Table / Banana Tree.
