October 25th, 2018
Topics for discussion: Capital Sources: Market Trends and Insights
· Andrew Peskoe, Co-Head | Golenbock Eiseman Assor Bell & Peskoe, LLP.
· Matt Wilber, Chief Financial Officer | Del Frisco’s Emerging Brands
· Rob Garrett, Chief Financial Officer | Aurify Brands
· Jessica Kates, Partner | Trispan Rising Stars LP
· Peter Mavrovitis, Head of Strategic Investments | USHG, Partner | Enlightened Hospitality Investments
E.B. Cohen hosted the 4th Hospitality Speaker series on October 25th at the Ludlow House, which covered the following topics: opportunities abound for profitable, multi-unit, growth strategies in the hospitality sector, capital sources and quality operators, and how the right capital partner does not always equate to the highest valuation. Attendees were able to network with others in their industry, while gaining a new view on substantial matters.
A panel consisting of industry leaders joined many within the hospitality community to discuss capital source market trends and to gain valuable insights into what capital sources look at for hospitality operators. Additionally, the panel reviewed how operators can position themselves for capital raises and what approaches successful operators have chosen and why.
“Is it time to take the money?” This question, and the advice surrounding it, seem to underlie the discussion of capital sources for the restaurant industry.
Andrew Peskoe, the discussion’s moderator, recounted a decade of available funds that the industry had not previously seen before, along with increased valuations, as well as debated if the trends would continue in the future or not.
Peskoe opened up the conversation by sharing advice of his own, “I’ve been telling clients, ‘take the money, don’t worry that the valuation feels higher than you can show, or don’t worry that your use of capital is a little vague, you should take the money because it may not be there in a few months.’”
Understanding the role that a growth and strategic investor plays to more efficiently grow a brand is crucial to the themes at hand. While various capital sources can be described as growth, control, and strategic; each investor views their role as strategic to the future success of the brand they are investing in. Typically, brands must be developed and have a proven track record of success beyond a few units, as well as beyond one or two geographic areas.
Jessica Kates indicated that a brand that travels well is much more attractive than a one-city brand. She offered advice on how to preserve success, “Maintain the essence of your brand and stay relevant to your customers.” She added on, “Don’t open in locations just because they are available and cheap today,” remarking that by doing this, a brand will ultimately result in its failure.
With all the excitement surrounding capital raises, and with valuations at a historical high, restaurant and hospitality operators must consider whether the availability of capital sources will remain at the robust levels it has been at over the last decade.
According to Matt Wilber, investors are adding emphasis on more global economic pressures and contemplating if a brand that is successful now, will also be successful in a recessionary environment. He detailed, “Today, you need to be thinking as a business, ‘what position do I need to be in to go through a recession?’” By thinking ahead, a business will have a better chance at survival, when a recession occurs.
According to Peter Mavrovitis, “It is challenging for us as investors in that we are kind of forced to pay high prices, so we will only do that for the best of the best.” He added on that the primary measure to look for in an operator is the cash on cash return, which can indicate whether an operator is truly worth investing in.
To ensure that the amount of capital raised is enough to sustain the business and accomplish the needed growth, operators must continue to operate as entrepreneurs, as well as with the confidence of a new capital raise.
Kates advised that operators should, “Focus on the preservation of capital and really try to operate with the ‘start-up’ mentality. In terms of your build-out costs, it doesn’t have to be the fanciest custom fixtures, to just maintain a low number of years of payback that you can.”
Likewise, many operators often debate if they are ready or not, and whether capital sources would be receptive to partnering, as well as look at the duration of operational success. While a string of openings and successful months may seem to be a positive trend, this could, unfortunately, be viewed as too short a term for investors.
Rob Garrett wondered, “How do we position ourselves as investors in this hybrid model to be able to take advantage and very carefully continue to build our business?” His advice was to truly take the time to nurture the brand before bringing it to market, allowing for it to live up to its full potential.
The evenings discussion juxtaposed many market forces and industry challenges, inspiring many questions from the audience. In fact, some attendees were able to offer advice of their own after going through both capital raises and full exits.
Unquestionably, the timing of when to infuse a venture with capital will depend on the operator’s definition of success.
Mavrovitis mentioned what he believes the critical moment of a successful hospitality brand is, “We are generally looking for concepts that have expanded, that have several units that have expanded into other markets, to prove that it’s not just a concept that works in New York, LA, or San Francisco, that it is something that has scalability.”
Peskoe opined, “It’s when the founder or CEO has built a team that is deep enough that the CEO can, in lieu of merely reacting, take a step back to pause, worry about a problem, and take the time to think before implementing decision.”
Wilber described his moment of success for an operator as, “When your company really establishes your culture and when the hostess knows exactly what the CEO or founder would do in a certain situation and everybody knows what the deciders would do, and they feel empowered to make those decisions because they know that’s the right decision.” He explained, “Then you are in a position where you can grow that company exponentially because everybody is on the same page.”
To add on, Kates explained, “It’s when you have your prototype model really set and you’re comfortable with it and it becomes replicable to the point it can expand into new markets.”
Garrett detailed, “That ‘aha’ moment is when after overcoming [many challenges], that hard work starts to show up in the financials.” He added on “It’s when an entrepreneur has conviction.”
The 4th Speaker Series concluded with a question and answer segment as well as with further networking by all attendees.