Via Wolf Street

PE firms have lots of cash but won’t invest it in their stripped-bare and failing restaurant chains.

By Nick Corbishley, for WOLF STREET:

After more than three months of not being able to serve either food or drinks, KKR-owned Casual Dining Group (CDG), one of the UK’s largest restaurant groups, collapsed into administration, a form of bankruptcy under UK law, on Thursday. The company, which owns the Bella Italia, Café Rouge and Las Iguanas restaurant chains, said it plans to shut 91 of its 250 outlets and cut 1,900 jobs. Bella Italia and Café Rouge are the worst hit, with 35 and 32 closures, respectively.

Like many restaurant groups, CDG was already struggling before the arrival of Covid-19 prompted the UK government to shut down all non-essential businesses in late March. Between June 2018 and June 2019 alone, more than 1,400 UK restaurants closed – the result of overcapacity in the sector, weak consumer confidence, and rising costs.

CDG is also no stranger to restructuring processes. In 2014, it entered a company voluntary arrangement (CVA), an insolvency procedure that allowed it to restructure its debt. Four years later, the company changed hands from private equity firm Apollo Management to private equity firms KKR and Pemberton Capital Advisors in a £150 million debt-for-equity swap.

Now, having fallen into administration once again, just two days before restaurants in the UK were finally allowed to reopen, albeit under severe restrictions that will make it even harder to turn a profit, CDG is on the lookout for a new owner, or owners. It has reportedly begun negotiations with “a number of potential buyers,” including European PE firm Aurelius Equity Opportunities, which has offered to buy up Café Rouge and Bella Italia. CDG’s other main asset, the Mexican-themed Las Iguanas chain, has apparently piqued the interest of UK-based PE firm Endless.

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CDG is not the only UK restaurant group to have hit hard times in the wake of the lockdown. Chains including Carluccio’s and Chiquito have already hit the wall, leading to thousands of job losses. Chiquito’s owner, The Restaurant Group (TRC), was, until recently, the UK’s largest restaurant operator, with over 300 restaurants, including the Italian-themed chain Franky and Benny’s and the pan-Asian chain Wagamama. Around a week ago, TRC also went into administration, announcing plans to close down 125 of its sites and lay off 3,000 workers.

Burger chain Byron has also appointed administrators and is seeking a new buyer. It if fails in that task, up to 1,200 jobs could be at risk. The Azzurri Group, which operates the Ask Italian, Zizzi and Coco di Mama brands and is owned by European PE firm Bridgepoint Capital, is also looking for a new owner. Other groups such as Prezzo, Wahaca and Wasabi have hired advisers to explore ways of keeping their businesses alive. Like CDG, many of them are hoping that a PE firm will swoop in at the last minute with an offer.

But a lot of PE firms are already nursing big losses from their own recent incursions into the UK’s casual dining sector. Since 2014, PE firms have splashed £10.4 billion on 132 deals in the UK’s restaurant and bar sectors, according to data from PitchBook. Now, many of them are lumbered with assets that are losing value fast due to the lockdown and the uncertain future facing the restaurant sector as a whole.

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It’s no surprise that PE-owned restaurant groups are among the first casualties of the coronavirus crisis. Just as has happened in the brick-and-mortar retail sector in the U.S., many PE firms have made their money by stripping capital out of their portfolio companies via special dividends funded by “leveraged loans” that are piled on the restaurant chains to carry.

This has left many PE-owned firms with little cash on hand and lots of debt to repay, leaving them in no position to weather even the mildest of storms, let alone a once-in-a-lifetime tempest like the Pandemic. In the U.S., 34 PE-owned companies filed for bankruptcy between March 1 and June 14, according to PitchBook, including household names such as Neiman Marcus, J.Crew, or car-rental company Advantage.

Though the PE industry has spent years building up “dry powder” — money that investors have committed to PE funds that hasn’t yet been invested — which reached a record $1.45 trillion globally as of June, most PE funds are loath to use this new cash to inject more capital into their stripped-bare and failing retailers, restaurants and rental companies they bought years ago. They’d much rather use the money — or may be obligated to use the money — for new investments.

Around 85% of all the dry powder in the buyout industry is allocated to funds raised from 2017 to 2019, according to analysis by the investment and consulting firm Cambridge Associates. Funds raised in earlier years are “running on fumes,” Andrea Auerbach, head of global private investments for Cambridge, told The Wall Street Journal.

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Even if firms wanted to inject newly raised funds into a struggling older investment, they might be restrained from doing so by their fiduciary obligations to their investors, said Brett Palmer, president of the Small Business Investor Alliance: “Fund managers have an obligation to their limited partners to ensure that the next dollar invested is a data-driven, market-driven decision, and not an emotional decision” that “has to make financial sense.”

At the moment, with many people still worried about the risk of Covid infection and new health and safety regulations shaking up the entire consumer experience, and with consumer demand uncertain, an estimated 47% of British pubs and bars and 53% of restaurants decided not to reopen this weekend. By Nick Corbishley, for WOLF STREET.

A zombie well before the pandemic, the UK company had racked up huge debts to finance rapid growth in a sector that had started shrinking some time ago. Read… Mall Giant Intu Collapses Into Bankruptcy

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