Value for Money? Private Equity in the UK Restaurant Industry, 2006-14

Abstract

A widely held view of private equity says that the buyout ownership model offers a way to run companies better than more traditional models. If true, this has high value in both private and social terms. One might therefore expect to see fee structures that are designed to reward private equity firms for running companies better. This piece of empirical research shows that in at least one recent example that was not the case. The article uses something close to a controlled experiment that arose by chance in the UK restaurant industry between 2006 and 2014. Three similar restaurant groups co-existed in the UK during those years. Two of them were buyouts while the third was a long-established quoted company. A detailed financial analysis shows that neither buyout performed better in operational terms than the quoted company. In itself, this shows that neither private equity governance nor the so-called “discipline of debt” always ensures that private equity-owned companies perform better. The article goes on to look at how much investors would have paid for the returns they received under different ownership models. One of the buyouts delivered operating performance that was almost identical to the quoted company’s. It also delivered lower gross returns to its investors. Yet private equity fee structures likely saw investors in this buyout paying more to their private equity managers than they would have paid in the quoted investment, despite receiving lower returns. The article shows that private equity fee structures can pay high rewards even when operating performance and investor returns are average, or worse. It breaks new ground by looking at the relationship between gross investor returns, portfolio company operating performance and fees.

Keywords: Private Equity, Buyouts, Fees, Institutional Investors

JEL Classification: G23, G24, G34