I have a new job and am in a new office. From my window, I look on to an Itsu and two doors down is a Wasabi. What if they were for sale? Which would you invest in? I invest for a living and have done for a number of years now. I should know. I should go into the shops and have a nose around and, by my sheer brilliance, I should tell you the answer and then maybe I would be the Warren Buffett of sushi. Or maybe, like one of the dragons in their den, I should ask a knockout question that would poleaxe the vendors and it would become obvious. Or maybe I should employ a 16-year-old prodigy who would run a special algorithm from their numbers and then I would have the answer.
But like Eat or Pret, Byron or GBK, Young’s or Fuller’s, I just don’t know. They both seem busy, look good, have food I buy, and the staff in both seem friendly.
Rationalising the facts
I work in private equity, the profession of the so-called ‘masters of the universe’, but I have to say that if such a group exists it doesn’t belong in my industry. Instead, we make our decisions based on boring rationalisation of the facts that we can glean from talking to people and from experience of what can go right as well as what can go wrong.
The balancing items (items introduced into a balance sheet to make the two sides balance) for our decisions are price and what is actually around to buy.
Most deals I have been involved in take between three months and a year to complete and, on average, I will file just under 1,000 emails before completion. Dragons’ Den this is not!
Also, most of my time is spent not investing. For every deal that I have done, there will be at least 50 I have looked at, which have led nowhere.
Yet for all this, private equity is a great industry to work in and has been a significant force for good within the leisure sector. It has provided finance for the vast majority of growth concepts in restaurants, pubs, cinemas, gyms, caravan parks and attractions in the UK. So what makes a great private-equity investment?
Management
Contrary to popular belief, most private-equity deals involve backing a management team and sticking with it to deliver its vision. Changes may happen, but for anyone who has been involved in this process, it is usually disruptive to the business and time-consuming. Quite simply, you wouldn’t do it out of choice. A good team needs a track record of delivery and a strategy, but above all it needs drive and commitment.
Action
The business plan must involve action. This could be through a rollout of a concept (eg: Byron), a consolidation play (Stonegate), a reinvigoration of a brand (Pizza Hut) or the development of a new concept in an established sector (Pure Gym/Gym Group).
Pricing
Simple. Don’t overpay and sell at the right time. The problem is that, to invest when the market doesn’t ascribe much value to an asset, requires supreme conviction and yet the alternative of following the crowd risks chasing pricing upwards.
Balance sheet
Don’t over-leverage a business. The trouble is that appropriate leverage can differ wildly for a business according to its position in its life cycle and its asset base, so while 4x EBITDA for a regional brewer should be very comfortable indeed, it might be wildly inappropriate for a high-growth leasehold restaurant business.
At Electra Partners, we benefit from an extremely flexible investment mandate, which enables us to optimise our investment method for each opportunity. One of our recent investments was in Park Resorts, a leading UK caravan-park operator.
It had suffered from too much leverage, which was used to support its acquisition at the top of the market, just before the downturn in 2008. In 2012 Electra made its acquisition by buying a controlling stake in the debt, thereby taking control of the business without requiring a wide-scale auction. Electra worked with the experienced management team, led by David Vaughan, and then introduced a new CEO to the business – David Boden – allowing Vaughan to assume the role of chairman. Park Resorts’ strategy was to reinvest in the fabric of the parks to ensure a better customer experience, which had been tricky in its previous cash-constrained position.
In addition, we saw the benefit of developing the business via consolidation opportunities available in the sector and, to this end, were recently able to buy the high-quality Lake District park business, South Lakeland Parks. Now, operating together, the two businesses form the largest holiday-parks operator in the UK, with 48 properties in England, Scotland and Wales.
Electra’s structure also enables us to take a flexible approach to ‘holding’ periods and so there is no need for a rush to the exit at the first opportunity. A good example of this is an investment Electra made in animal tagging company Allflex – which Electra held for 15 years – growing profits six-fold in this time. With such positive growth and the prospect of creating a truly global, market-leading business, we chose to hold the business and benefited from this by returning 15x the original investment stake on exit. Had we been subject to traditional timescales we would have had to exit the business long before.
So back to the competing sushi offerings. The truth is that individual preferences rarely drive investment decisions, which are more usually based on some of the elements described above and, of course, what comes to the market. In that respect, a flexible approach to the type, method and timescale of investment means my new home is in a good position to make further investments in the leisure sector.
Bill Priestley, former managing director of LGV Capital – backer of Amber Taverns, Liberation Group and Novus Leisure – is a partner at Electra Partners, an independent private-equity fund manager
