Private equity debt financing will return to the casual dining sector as it begins to recover, Alix Partners MD Graeme Smith has predicted.

Speaking on MCA’s The Conversation, Smith said a sensible level of debt made for good financial management, once the sector has stabilised.

He said operational gearing such as reduced rents would also be a crucial factor as the sector looks to achieve a sustainable recovery.

Smith was speaking after Alix Partners worked on the sale of Casual Dining Group, now The Big Table, to Epiris, a deal which involved no external debt.

The private equity debt model has come under fire during the crisis, and has been blamed for exacerbating the financial difficulties of successful restaurant groups such as Pizza Express and Azzurri Group.

Smith said: “Whilst there may not have been any external debt on the CDG transaction to begin with, I’m sure at some stage, once everything is stabilised and growing again, then having a sensible level of debt on these businesses is good financial management, and helps to reduce your cost of capital.

“I don’t think we’ll see debt disappearing from the sector, but I think people will be taking a sensible look at it, and taking into account the operational gearing from rents as well at the same time.”

He described the CDG deal as “vote of confidence” for the prospects of the sector, and a sign it will “thrive again on the other side of this this disruption”.

Defending the private equity roll out model, Smith said over-capacity was a result of well-intentioned expansion from multiple investors.

He said: “Unfortunately, it just got to the point in a cycle, as it often does, where more and more investors become alive to the opportunity in casual dining.

“Unfortunately with the lead time of investing in sites and opening them, often they’re looking at the same data, so you get this surge of capacity in locations, where one or two restaurants opening up will give a good return, but if that rises to four or five then the demand just can’t support that level of investment and increase in capacity.

“Yes PE money did fund large expansion into the market, but they were backing enthusiastic management teams who wanted to grow their particular restaurant brand.”

Meanwhile Smith said property costs would fall with less supply in the market.

He said: “With fewer people looking to expand, then a likelihood of there being better deals around to be done with landlords is there

“There will unfortunately be quite a sizable number of sites that won’t reopen.

“We’ll have to just wait and see where that shakes out, but there will be reduced competition.

“So, a couple of those factors which were heaping pressure on the sector on the way into the crisis, such competition and property costs, will have been through a bit of a reset during this crisis.”

While still a “big unknown”, Smith said there were positive signs of returning consumer demand to eat out, and predicted a return to profit in 2021.