Specialist investors have been busy within the sector, but there is a need for banks and generalist private equity players to return to the market, delegates at MCA’s Restaurant Conference heard.

The positive way that institutional investors have reacted to the recent float of Tortilla and Fridays is a big vote of confidence according to Robin Rowland, operating partner at TriSpan, “because they are voting on one or two years hence valuations.”

Rowland was talking as part of an investment panel at MCA’s Restaurant Conference, going on to say: “Something cyclical is going on, we are at the start of a wave which means the stronger will become stronger and the weaker will disappear. There will be a shakeout.”

Ali Aneizi, founder Tamweel Capital shared Rowland’s optimism saying, “the mood music is definitely better than last year and provided we are not hit by some Covid curveball I am pretty fired up about next year,” but added that, “the coming months are still pretty shaky. There is a lot of uncertainty out there.”

Darrel Connell, partner at Imbiba spoke about the company’s recent M&A activity. “We are all in on the sector, so when Covid hit, it was a case of let’s double down and go fast.”

“In the last in the last 12 months, we made six new investments into new companies, five of which are in the sector. And we’ve got a further two investments which should close in the next month. We think it’s a great time to be investing.”

Turning to expansion and the acquisition of new sites, Connell said “we signed up between 30 and 40 new sites across the portfolio when the market was quiet. Now it’s super, super hot. Property is much, much harder, than it was even six months ago, certainly 12 months ago”

Supporting Connell’s comments, Aneizi added that, “the appetite for deals comes from the sector specialists still. The generalists have pulled back somewhat,” adding that it was a buyers market due to the level of uncertainty. “Unless you are a standout brand, a brand that is knocking it out of the park, the terms that are being agreed on deals at the moment reflect that uncertainty.”

Aneizi talked about the difficulty in forecasting where revenues were going to land over the coming 12 months, as well as difficulties around cost pressures. “So, our stock advice,” he said, “is unless you have a need to do a deal right now, let things play out over the coming quarter or two, and then revisit those conversations next year.”

Rowland was more bullish, saying: “If you have dry powder there are deals to be done, but you need to structure the deal so that it works for both parties,” adding that there was a need to be a bit more creative about how deals are structured and about how a valuation is arrived at.

“The banks are slightly standing back a little on the sector. That will change I suspect as we go into next year. Once they are in play it makes it a little easier to structure the deals.”

Aneizi hoped that lender appetite would come back into the sector “because that sort of drives pricing and it results in better deals for founders and operators.”

He mentioned that many of the deals that were happening currently were highly structured, meaning that a lot of the risk was passed back on to the operators and back to the management teams. “In simple terms, it means if you continue to grow and continue to hit your numbers you don’t need to worry about it. It becomes more of an issue if you are no longer on that growth journey for whatever reason, then those terms start to bite.”

The importance of resilience was also discussed by the panel. “Businesses need to demonstrate they can withstand shocks, whatever those shocks are. Business that can demonstrate that are the ones that investors are going to take most interest in,” Aneizi said.

Connell picked up on this theme saying that “a big thing we are looking at at the moment for every new investment is margins. Having higher margin businesses is important as they can cope with a rising cost base.”

He said that “low margins are a real no no for us,” adding that when he was modelling returns at the moment the company was running a form of stress test whereby “we are effectively cutting site margins by 5% to see what it looks like.”

Rowland talked about the “robustness of the concept.” He said that a lot of consumer research is undertaken to make sure it really resonates. “It has to be differentiated, it has to be bloody good at what it does, and it better have some real depth in the operations. We have to work with entrepreneurs who have great businesses, great teams around them.

“I want to make sure we are not buying something that has flaws in its execution.”

Rowland also said that there is a need to rebalance between dine in and delivery, because “the growth of delivery cannot be at the risk of not growing the dine in business. We are trying to build the experience inside the four walls, while maintaining our brilliant to go business. That’s an important balancing act to make money long-term.”

Both Rowland and Connell discussed what they were looking for in terms of current investments, with Rowland saying he was looking outside of London to a large extent due to there being some really good regional operators, “which I think are hidden”. He also mentioned looking at concepts that have embraced technology, and where the entrepreneur will stay in the business.

Connell was focusing his attention on destination businesses: “A destination piece with a social media piece wrapped round and a brand and a presence and dynamism to it.”

Regarding deals coming to market Aneizi said he believed that most of the deals that were going to go to market in early 2020 “will be dusted off and be revisited next year.”

Connell talked about a need to see generalist private equity come back into the sector. “It’s really encouraging to read about Alchemy and Brasserie Bar Co. I don’t know if that’s true, or not, but these things are really, really important

”We need to be part of the wider economy. Other sectors are booming in terms of M&A activity with trade acquirers. We’ve not been as a sector and we need to see that come back next year.”