Inside Track by John Harrington
If you want to grow a business in the leisure and hospitality sector from scratch these days, and aren’t blessed with a big amount of upfront cash, there aren’t too many options out there.
The problems of funding from banks is well documented, and while there’s certainly been an upswing in private equity interest in the sector recently, a proven track record is almost always a must-have for securing investment.
It’s not surprising then that there’s been a recent resurgence in pub operators looking at the Enterprise Investment Scheme (EIS), the tax-efficient investment initiative. Not least David Bruce and Clive Watson, founders of perhaps the most famous EIS-funded pub company Capital, who are planning to build another EIS-funded pub estate under the City Pub Company venture.
Their experience shows that EIS can be lucrative. Capital, which raised over £15m under EIS, expanded to an estate of 34 top-end London pubs before its sale to Greene King for £70m last year. Last month Foundation Inns founders Gavin Drew and Ian Grundy announced their intention to seek investment under EIS for their new pub venture, and Convivial London Pubs chief executive Kris Gumbrell is to follow suit with plans for an estate of brewpubs.
The timing is no coincidence; new incentives are set to come into play from April. The annual amount an individual can invest under EIS is to double to £1m and employee limits increased from 50 to 250, while the maximum sum that can be invested over a 12-month period will increase from £2m to £10m and pre-assessment income will rise from £7m to £15m.
All very positive, but while the pub sector is chomping at the bit to exploit the scheme, it’s curious that others in the wider hospitality industry have been less enthusiastic.
To be fair, one part of the sector has had no choice. Since 1997, hotels, commonly defined as businesses whose income from letting rooms exceeds 20%, have been excluded. Hoteliers are understandably unhappy, and last week the British Hospitality Association (BHA) announced that it would be lobbying the Chancellor to scrap the anomaly.
But what of restaurants and other food-focused retailers? There’s no block on these groups using the scheme, but few restaurant operators have eyed the EIS approach.
Miles Quest of the BHA suggests it could be partly because investors have traditionally been “very wary” about lending to the restaurant industry, “because it’s mostly rented with no freeholds”. “I think the restaurant sector is viewed as a much riskier and less attractive sector to invest in [compared to other hospitality businesses] because it’s not primarily asset-based.”
This could explain why EIS-funded pub companies have been looking primarily for freeholds estates. But tenure shouldn’t be a deciding factor for those being asked to part with their cash; the brand covenant of a well-known operator should soothe investors’ fears. It may be that EIS is more suited to senior industry figures with proven track records.
Tenure aside, is would-be investors’ hesitancy towards restaurants born out by the facts? Figures from the Insolvency Service show that while the number of pub and bar operators falling into administration more than doubled between Q2 and Q3 2011, administrations in the restaurant sector actually dipped slightly.
There are also signs that restaurants are benefiting from the growth in premium dining during the downturn, while survey after survey predicts the growth in food and a decline in wet sales over the coming years. Private equity certainly has confidence in the sector, with the likes of Tortilla, Wagamamama, Rossopomodoro and Brasserie Blanc enjoying injections of cash from private equity over the past year or-so.
With question marks remaining over banks’ willingness and ability to lend following the Eurozone crisis, perhaps 2012 will be the year that start-up restaurant businesses follow their pub colleagues down the EIS route.
Pub sector’s best on show
If you’ve noticed an unusually high number of out-of-office replies from us at M&C and our colleagues at the Publican’s Morning Advertiser recently, rest assured, we’ve not been slacking. The team has been hot footing it around the country sampling some of the best the industry has to offer as part of the judging process for the Publican Awards, which concluded last week with a finalist Q&A session in London.
Without giving any hints as to the winners, feedback overall has been extremely positive. Across the piece, from regional brewers to national pubcos, from late-night bar firms to gastropub operators, it’s clear that the cream of the industry is truly pushing the boundaries and leading the way in innovation in the licensed retail sector.
It’s been a pleasure to see that the pub trade has been investing so much in its sites, its marketing and its people to emerge from this difficult trading period stronger than ever.
The best in the business will be on show at the Awards night on 27 March, and it’s not too late to book - visit www.publicanawards.co.uk. See you there.
