From Failure to Phoenix

Can we find any good news in the bad? Looking at the headlines over the past few days it would seem unlikely. Famous brand names seem to be going down like flies. From Byron Burgers (made infamous by George Osborne sending out for his late-night snack) to more familiar high street names such as Café Rouge and Bella Italia, the high street café restaurant and dining sector has been well and truly decimated.

However, although these most recent failures have been blamed on the pandemic, the sector was already having significant problems with a growing list of failures. Just remember Jamie Oliver’s Italian restaurants, and Carluccio’s, both of which had suffered financial troubles before the virus hit. This sector has unfortunately suffered from being the fad of the decade, for although lower cost eating out appealed to our consumer led economy, restaurants have traditionally been one of the riskiest businesses to invest in and the failure rate has been significantly over 50%. 

One reason is the unreliability of previously trendy brands, which turn from haute couture to tank top in a matter of weeks. There is though, an underlying commonalty of risk below the surface for many of these businesses, and that is their style of investment and finance. This is often the world of Private Equity.

Private Equity companies have also become popular over the past two decades, and during that time have financed many retail business transactions. Within that, there have been many successes. However, much of this has glossed over not just the failures but the risks which seemingly many of the clients did not to fully appreciate.

Now please don’t get me wrong. There are Private Equity white knights in this sector doing the right thing, but there are also dark knights designing financial investments often for the benefit of themselves based on the risk and hard work of the company being invested in.

My main concern is the relatively short-term nature of Private Equity. The usual investment period is three years, although some will say five years. In my experience most who go to five years are those which they could not offload in three.

The model is simple: financing provided to restaurants which, in this instance, are often run and developed by talented chefs and restauranteurs trying to become successful entrepreneurs. They see access to investment as very exciting and a great opportunity- which it is. However, many don’t appreciate that three years is not a business cycle and is an incredibly short time span. In effect, shortly after the investment has started, many will have to start planning for their next investment partners almost immediately.

The PE companies will usually provide their investment by borrowing. However, they do not borrow themselves, but rather enable the restaurant companies to bear the debt and of course both the risk and the cost. The aim therefore from the PE companies’ point of view will be to sell on the business to another investment firm, which unsurprisingly turns out to be another PE investment company, which of course come out with a brilliant idea of arranging yet more borrowing and debt for the company. As each deal is completed the weight of debt rises as the business gets lower and lower in the water.

The PE firms have thus designed a very effective business of financial pass the parcel which carries on until the last one holding the parcel has to manage the final fate of the entrepreneurial business going bust.

The phrase I have found especially nauseating, often trotted out by these firms was that they were making sure that you had an ‘efficient balance sheet’, that is a euphemism for increased borrowing, often to a level which would then appear to be a very unbalanced inefficient balance sheet.

So, is there any good news? Well leaving aside the disaster of the pandemic, quite a number of businesses will have a valuable and viable product and service at its core. This provides opportunities for those willing to take the risk of going in to bid for the rotting carcass of these dismembered businesses. And so, these investment companies and funds searching among the debris are referred to as vulture funds. The title might appear negative, but don’t knock the vultures: they provide a vital and valuable role on the Savannah, and so too can their namesakes in the now dry and dusty plains of the UK retail restaurant market.

Perhaps then it would be fairer and more positive to provide them with the more creative title of Phoenix funds, allowing new businesses to arise out of the ashes of its predecessor. However, the Phoenix is a purely mythological bird, whereas vultures do really exist…

So there can be a positive outcome for some of these businesses, despite the pain they have been through, but I would urge entrepreneurs to learn from this and avoid the debt junkies and dark knights of the Private Equity world, loading you with short term borrowing, risk and liability, and look for those willing to provide you with a longer term partnership of not only the risk - but also, ultimately, the benefits.

Hearse with sign 'Body On Board'.

 And finally…What makes a valid passenger?

A Nevada Highway Patrol trooper was stunned after he pulled over a hearse that was driving in the carpool lane, and the driver asked if the corpse he was transporting counted as a passenger.

Trooper Travis Smaka had spotted the Chrysler minivan hearse going southbound on Interstate 15. The driver appeared to be alone- but that was because the trooper was not counting, “the dearly departed in the back,” as Nevada Highway Patrol Southern Command later explained.

The Trooper flashed the lights of his patrol car and pulled over the hearse driver, collecting his license and registration. He was expecting to hear one of the more typical excuses- that the driver was running late for an appointment or on his way to an emergency.

But instead, the driver nodded toward the rear of the minivan. Smaka took the hint and asked, “Oh, you have a deceased in the back?”. That’s when the driver pressed his luck and replied, "So, he doesn't count?". The trooper had no choice but to break the bad news- cars are only allowed in the carpool lane when they’re carrying at least two “living, breathing people.”.

Other drivers have attempted to place less-than-stellar stand-ins for actual people in the passenger’s seat. One Washington man attached President Trump’s face in cardboard to the headrest. 

In California, a driver tried to pass off his full-grown German shepherd as a legitimate passenger- after all, the pup was wearing its seatbelt just like a human. "This guy told me that he shouldn't get cited because the dog was a family member.”.

Presumably, he was “three stops short of Dagenham” (which on the London District Line is Barking).

Have a good week.

Justin

Image source: Paul Kinsella (2012). Cartoonstock.com