Private equity and the pub trade

Why does private equity get into the pub market in the first place?

Pub estates are like any other property in terms of investment; being asset backed they're stable. You can raise sensible finance against them and generally if there's a downturn in the property cycle you're usually able to hold onto them through the cycle and you should be able to at least get your capital back, eventually.

There have been a lot of changes to the sector, particularly on the High Street. In the community and destination pub arena, demographics alter more slowly over time.

But as long as you keep up with the changes then you'll have a fairly stable stream of income. That makes things interesting from an asset backing/protection point of view.

Why get back into the pub sector now with the Orchid Group?

We didn't 'get out' of the sector, we simply haven't had a pub company on our books since we sold Yates's in 2005.

We never took a decision not to be in pubs. We bought Yates's and nine months later we had an attractive offer for the business and sold it. It's not that we didn't enjoy the experience of owning pubs and wanted to get out.

On the contrary, we had a very good experience and had a very attractive exit. The pub estate that created the majority of Orchid was an opportunistic transaction. We're always interested in the licensed sector.

Private equity firms are accused of being short term in their view. Is this fair?

We're seen as short-term, and stock market-listed groups are seen as long term. But it's not that simple. The publicly-quoted market is focused on earnings growth and on a regular reporting of that growth.

If a listed company is meeting earnings forecasts then they are left alone by analysts. If they fail to deliver, even quarterly, then all hell breaks loose.

I'd argue that in the public market, strategy is driven by short-term demands and require continual marketing to shareholders, etc.

We took Yates's from public to private ownership and were set to own it for a number of years, but in the end it was nine months.

We were approached with what we believed was a good offer that represented very good value for money for our pension fund investors. It's our responsibility to take a view in those circumstances and since we didn't think we'd get that kind of offer for some time it made a lot of sense.

What about the accusation that private equity firms are only interested in stripping the value out of a business?

There are groups around who might fit this profile, but 'stripping assets' implies you are destroying something. It's better defined by thinking of it as a structural change, so that something becomes more valuable to somebody else.

It's also the kind of restructuring that should be done in the public market, but usually isn't. If we pay a top-of-the-market price for a pub estate which has been underinvested, and then we invest a considerable amount of money in those pubs and end up on the other side having made a profit - and those pubs are trading much better than they were previously - then that's not such a bad thing, surely?

Think about the stakeholders who are happy in those circumstances: obviously we and our investors are, our pub customers are because they've got better pubs to visit, and our managers are happier, because they earn more in bonuses since they have more customers coming in because the pub looks and is better. The senior management is happier because they have an estate they can be proud of and can duplicate the strategy across other estates the company might acquire. I don't know what's wrong with that. I certainly don't think that approach could or should be called 'short-termist'.

If we fail we've lost our own personal investments as well as the pension funds'. We'd find it very difficult to raise another fund so our livelihoods are affected, and all the people who have their money invested in pension funds suffer as well.

Private equity involvement is usually five years, so can we expect GI Partners to sell Orchid in late 2011?

We don't put a five-year maximum on a business like this, we just think between three and seven years is the appropriate holding period. That's not particularly short-term. Private equity represents an acceleration of what should happen to a company, whether it be a restructuring, repositioning, selling surplus assets, and so on.

We put the foot on the gas. Our approach allows a management team to focus quite clearly on a few things, rather than having to worry about how their message is translated to thousands of different shareholders.

I believe that management gets more freedom to operate under private equity ownership than in a publicly-owned business. We have to report to our investors, but they understand from the start that we hold the business for a period of time. Inside that time period there'll be a lot of changes made to the business but they rely on our historic track record to deliver on the investment as a whole.

What kind of exit are you looking for?

A good one! If someone comes along and offers an exceptional price then of course we'd consider it. That's part of our job.

If a buyer believes that they can do a better job and are prepared to pay, fair enough.

It's fundamentally about risk/reward and to a large extent it's a judgement call on our part.

What does the future hold for GI's involvement in the pub sector?

The whole premise behind what we're about is to make pubs fit the environment they were designed for. We are trying to create the proper environment for our pubs, to make them more rewarding for all concerned. At the end of the process everyone should win.