Viewpoint – Investors seek returns

Hospitality faces two scenarios in 2012 as the top teams progress but those at the bottom struggle, says Graeme Smith a partner at Zolfo Cooper

Sport is a rich theme this year and it's already apparent that 2012 will produce its fair share of winners and losers in ­hospitality.

We see two distinct business issues playing out in the next 12 months: one a very positive trend that will give stand-out companies access to growth funds; the other an unfortunate continuation of the headline-grabbing pain to which we have become accustomed whereby companies must either undertake painful financial surgery or succumb to their debts.

First, the good news. What is clear is that buyers and investors are returning for good businesses with strong management teams and exciting growth prospects. Examples of this can be seen with deals recently concluded for Soho House, Apostrophe, Be At One and Vinoteca, plus last year's acquisition of Mint Hotels by Blackstone.

Private equity companies in particular are once more getting behind growth companies, and with good reason: many have cash burning a hole in their pocket - which they must spend. This is because most private equity funds work on 10-year timeframes: once a firm has raised money through a fund, it has five years to invest the money and then another five years to exit. Any money not invested in the first five years may have to be returned to investors.

As we know, 2007 was a high water mark for private equity funds, with almost £30b raised by London-based firms. Because of the economy, much of that cash remains uninvested and 2012 is the year they must put it to work.

This does not mean we will see an unfocused spending frenzy, but the concept of returning cash is alien and against this pressure to invest, the investment criteria may well soften particularly in relation to return requirements. As a consequence we expect to see more deals that marry high-quality, growth companies with private equity investors.

At the other end of the spectrum, some companies must address a financial hangover from the last economic cycle. Many are carrying too much debt and face refinancing deadlines. In these cases, the banks won't be able to renew their support, and painful restructuring surgery will ensue.

It is a process that has been under way for some time, which in some cases has seen banks emerge as the new owners of restructured companies. However, they are not long-term holders of assets and the dawning reality that there is no quick recovery coupled with the fact that hotels, restaurants and pubs are capital intensive, is beginning to force a re-think.

This combination of private equity money with pressure to invest and some banks minded to sell, should lead to a narrowing of vendor-buyer price gap and more deals.