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Alternative investment – unlocking cash

22 February 2013
Alternative investment – unlocking cash

Banks may be battening down the hatches, but they're not the only source of funding for hospitality operators. Elly Earls explores alternative ways to fund that new concept, site or renovation

The beginning of a new year invariably brings with it renewed motivation to finally get a move on with that new concept, site or renovation that's been languishing on the back burner for months. But with many banks refusing to lend to anyone they don't know and avoiding anyone without a long and exemplary track record, finding funding for your idea can be disheartening.

"It's still very difficult to get bank debt in the current market unless you are a proven, successful investor in the sector," says Philip Camble, director at Whitebridge Hospitality, a specialist advisor for investors, developers and operators in the hospitality industry. "For any entrepreneurial new entrant it must be virtually impossible to secure bank lending."

Though there has been a softening of the lending market for hospitality businesses, David Grant, director and head of UK business mortgages at Christie Finance, says lenders remain wary of anything that carries the remotest risk. "Most transactions have tended to involve either existing operators or individuals who are experienced in the particular sector in which they're buying," he says.

And the situation is unlikely to change drastically for hospitality operators in 2013, though if you meet a bank's lending criteria it's not impossible to secure funds.

"While banks have become more cautious, they are very much open for business," says Mike Saul, head of hospitality and leisure at Barclays. "Our lending criteria have not changed. We evaluate businesses on their individual merits, so there is every opportunity to secure funding, and if businesses can get a few key things right, they will put themselves in a far stronger position to do this."

For example, banks want to see a considered business plan, which takes both a long- and short-term view, a strong management team and a good understanding of the sector.

"That said, we have to be responsible in our lending, ensuring each loan meets acceptable risk limits, otherwise it wouldn't be appropriate for the borrower, or the bank," adds Saul.

Alternative initiatives So, what if your business is too risky for the increasingly cautious commercial banks? According to Anil Stocker, head of policy at the Next Generation Finance Consortium, you're certainly not out of options. "The good news is that shortfall in bank lending is being met in part by a range of new finance platforms and challenger banks like Crowdcube and Metro Bank," he emphasises. "These alternative finance initiatives made great strides in 2012 and are set to continue in 2013."

Moreover, you have the options of: private investment from private equity houses, venture capital firms or high net worth individuals; the sale and leaseback route, which Premier Inn, among many other operators, has found extremely useful; online platforms such as Business Cash Advance and MarketInvoice; and even customer bond schemes, which have been enormously successful for chains like Leon and Hotel Chocolat.

Crowd sourcing and other online platforms

More and more hospitality operators, particularly restaurants, bars and pubs, are opting to raise money online, whether that's through crowd funding platforms or cash advance companies.

A new private members club, Rushmore in Soho, raised £1m in 2011 through Crowdcube, a funding platform for UK businesses. With more than 100 investors, the group managed its target in less than four weeks. "While crowd funding has typically been seen as suitable for raising smaller sums, this deal has proven that the hospitality industry is suited for next generation, internet-based financing," says Anil Stocker.

Indeed, Scotland's largest independent brewery, Brewdog, raised £2.2m online with its Equity For Punks crowd funding scheme, through which investors could buy share bundles starting at £95. The company secured funds from 7,500 investors in 32 countries and invested the money in its brand new state-of-the-art brewery in Ellon.

"We wanted our investors to be truly invested in the product," says Brewdog co-founder James Watt. "We're a brewery and our investors should be beer fans first and foremost. We opened our new brewery on 19 January and over 200 of our investors braved the cold to come and celebrate the occasion with us. It was very humbling to see so many proud faces raising their beer-filled cups to the start of a new era for all of us."

Many hospitality operators are also investigating the increasing number of cash advance companies that are popping up online. Business Cash Advance, for example, provides companies with fast working capital to inject into their businesses, but there are no fixed monthly payments; rather your advance is paid off with a percentage of future credit and debit card sales.

Similarly, MarketInvoice allows operators to quickly access the cash tied up in their invoices. "Events company CS Live has made use of the service because they often do not receive payments for months," Stocker says. "Now they can invest the money back into the company immediately, rather than waiting for payment."

Sale and leasebackA sale and leaseback transaction allows an operator to raise money from the sale of an asset, while still retaining the use of it by leasing it back for the long term. And according to Jagdeep Kapoor, a partner at Moor Park Capital, which specialises in strategically driven, real estate transactions in Western Europe, these sorts of transactions are gaining in popularity.

"There is an increased appetite for companies that own their real estate on balance sheets to refinance their debt overhangs through a sale and leaseback solution," Kapoor says. "We're likely to see more of these transactions as they are a good means to divest non-income producing real estate and release funds needed by companies to refinance their debts or reinvest in their businesses. The difficulty of securing bank financing at the moment makes sale and leaseback an even more attractive option."

But, again, there are disadvantages to this route. "It is significantly less flexible, both in terms of rental fees and moving location," Stocker says.

Moreover, compared with "sale and manage back", sale and leaseback is less attractive to many investors. "Big operators with inventory remaining are more likely to sell it on a sale and manage back basis," Philip Camble explains. "It's less onerous on the operator's balance sheet and perhaps more appealing to investors and lenders given the recent spate of de-leasing."

Nonetheless, hotel and restaurant group Whitbread recently agreed a sale and leaseback deal of seven of its Premier Inn and joint restaurant sites in a deal worth £51 million. The group will sell the properties to NFU Mutual and Standard Life Assurance Limited, which will then enter into 25-year leases with Whitbread, which will continue to operate the sites.

Private investment

Private investment generally comes in three forms: individual private investors who could be anyone from a friend or member of your family to a high-net-worth angel investor; private equity houses, which control a collection of investors and funds that come together to invest in private companies; and venture capital firms, a type of private equity house focused on start-up companies.

For Anil Stocker, the key advantage of private investment is the experience these lenders bring to the table. "Venture capital often has the benefits of coming with serious expertise and engagement from the investor," he notes. "Similarly, private equity investors are secure and experienced sources of funding, and private investors are often serious players in the market and are well worth searching for."

Philip Camble says it can be just as hard to secure lending from these sources as it is from a bank. Private equity houses, in particular, will usually only invest in going concerns, and all three forms of private investment are expensive. "They seek very high ROIs that are difficult to support in the current market," he says.

Yet, deals are certainly being done. Private equity house Patron Capital, for example, has been involved in the acquisition of the Luxury Family Hotels portfolio from the administrators of the Von Essen Group, among other deals.

"We're a partner rather than a lender," says Josh Wyatt, investment director, hospitality and leisure, at Patron Capital. "We're able to provide often difficult-to-secure capital expenditure as well as strategic business input and we look for assets where we can deliver value through our creativity and management expertise."

Z hotels gets off the ground via private investors

When Bev King was looking for investment for his new hotel concept, Z Hotels, he didn't bother approaching the banks, but went straight to private investors.

Bev King, along with business partners Rich Meehan, John Raymond and Jamie Goldstein, launched Z Hotels in 2011, after ditching earlier plans to launch a boutique hotel group because of the difficulties of obtaining funding.

He wanted to create a hotel chain that was affordable but stylish, centrally located, and with top-quality technology and facilities in its compact, sometimes even windowless, bedrooms. He also wanted to do so without having to inject huge amounts of cash into the business. So King and his partners bought Z Hotel's first two properties on a leasehold basis and funded the redevelopment costs, while the remaining equity came from 12 short-term private investors.

"We didn't talk to any banks," King recalls. "We went straight to private equity. As a start-up, it's so difficult to get a bank to look at what you do, it's ridiculous."

Of course, the investors had to take a leap of faith, as Z Hotels' concept was not yet proven, but this was factored into the price King and his partners repaid them as a return on their investment. "You're not giving them 1-2% like you would if they were putting their money in a very secure bank; you're giving them 20% return," King says.

"It's high risk, but it's worked out very well. We've given our investors their return and they've all agreed to invest in another property we're about to sign an agreement on."

Leon restaurants relies on its loyal customers to raise cash

For Henry Dimbleby, co-founder and CEO of casual dining chain Leon Restaurants, it seemed silly not to make use of his brand's supportive customers when he wanted to raise cash.

Dimbleby and Leon co-founder John Vincent plan to open 10 new sites by the end of 2015 and set up a not-for-profit organisation, the Leon Foundation, to help children with renal illnesses, but they won't be using bank funding to do it. Instead, they hope to raise the £1.5m they need through a customer bond scheme, which was launched last summer and inspired by Hotel Chocolat's "chocolate bond".

"It had been in the back of our minds for a while," Dimbleby says. "We've got all these people who are incredibly supportive of what we're doing and we wanted to let them share in some of the business upside. Then we met Angus Thirlwell [CEO of Hotel Chocolat], who was raving about how the chocolate bond had been so positive for his business, and he helped us think about how we could make it into something concrete."

Now, in exchange for taking up a Leon Bond, customers receive a return in the form of "£eon Pounds", which can be used in Leon restaurants. They are also entered into a quarterly prize draw where they could win anything from a year's supply of Leon brownies to a Thai cookery course at their home. Investors receive gross rates of return of 10% for a £1,500 investment, rising to 15% for a £5,000 investment, with repayment after three years.

"We're very pleased with what we've raised," Dimbleby says. "And we're keen to make it a regular thing so new people can get involved too."

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