Luke Johnson: The thrill of the chase

Luke Johnson hunts down a good deal; and discusses why restaurants are becoming the career of choice for graduates.

by Luke Johnson
Last Updated: 06 Nov 2012

It appears deal season is upon us. I have been busier pursuing possible investments in recent weeks than for a long time.

Of course, it may all end up being a waste of effort: every proposition could turn out to be a dud, or we might get outbid by bullish rivals on each occasion.

But I travel hopefully. For the truth is that it is hard to match the adrenaline rush of a new venture, the possibility of capital gain - as well as the risk of loss. In a way, the frantic chase is a mug's game, because much of your energy is expended on projects that come to nothing. And the more ambitious you are, the more likely it is that you fail to capture your prey and walk away empty-handed.

Moreover, it can be argued that making an investment is the easy part. The hard graft comes in growing a business and turning it into a profitable bet. That takes several years - perhaps as many as eight or 10. So although there is great excitement when you actually complete an acquisition, it is always some time before you know if the entire undertaking has been a financial success. Backing private companies is a long-term game and requires stamina.

Yet the drama of winning or losing such contests, and seeing a company thrive, is so satisfying that I would be reluctant to give it up for work that was perhaps more stable but less stimulating. I accept that the private equity industry is not saving lives like the medical profession, but I do believe that development capital, which is what we provide, is largely concerned with expanding firms that are creating jobs - and helping the economy recover.

Of course, some transactions go wrong, and there are many frustrations. But in general my job is a privilege - I get to be in partnership with terrific entrepreneurs, and if things go well we make a positive difference. What could be better than that?

It certainly seems that ever more academic high-flyers want to be hands-on entrepreneurs, especially when it comes to the business of eating out. Traditionally, restaurateurs worked their way up from waiting tables or the kitchen; many were immigrants with little formal education but plenty of ambition.

Nowadays, every Mexican food concept or gourmet coffee shop is being started by a recent Oxbridge graduate or a highly qualified refugee from the City. Until fairly recently, such members of the elite went into management consulting or to work at investment banks or with hedge funds. These days, it seems, even at the prestigious business schools, the cool thing to do is create a catering concern.

The caterers who make up this new breed write much better business plans than their predecessors and are sophisticated at fundraising. However, they often lack experience of the sector and do not have the connections within the trade that veterans possess.

Nevertheless, as someone who has spent more than two decades in the hospitality industry, I applaud this trend. Food and drink remain fragmented, growing markets, where the major companies tend to be weak at innovation. Thus there are always opportunities for those bold and hard-working enough to take the plunge. Even if such start-ups represent further competition for my various eating-out investments, I'm pleased that the profession is attracting such talent.

Anyone getting involved in serving food to the public must realise that the hours are long, the work is tough physical labour, and that your cash takings will get stolen if you don't take precautions. Meanwhile, diners have an almost infinite choice of places to go for a meal, so you do need a distinctive offering, backed up with a sound business model, in order to succeed. But I feel that the rewards - intellectual, social and perhaps even financial - are worth the sacrifices. Being a winning restaurateur probably even beats being a superstar in the private equity world.

Britain faces the same old fork in the road: do we follow the Europeans or the Americans?

The French have just elected a socialist president and threaten a new 75% tax on the super-rich, no public sector job cuts and a lowering of the retirement age to 60. Their major banks are the most highly leveraged in the world and have hardly begun to rebuild their balance sheets. Spain has two million unsold homes and is in denial about property write-downs. The Greeks seem hell-bent on committing a form of economic suicide. In Italy, vital reform seems mired in bureaucracy and political indifference.

Meanwhile, America's banks have suffered deeply, yet are now among the best capitalised in the world. AIG underwent a severe restructuring, but has repaid $150bn of bail-out money to the Fed and is on course to deliver the US government a $15bn profit. The US's automotive industry is enjoying a huge resurgence after the creative destruction of Chapter 11 bankruptcy in the case of GM and Chrysler. US property prices have fallen by as much as half, but now homes represent good value.

Thus European unemployment is at 9% and rising, while in the US it should fall below 8% in 2012. America could expand by 3% this year - the eurozone would be desperately grateful for 1% growth.

I know which role model I prefer.

Luke Johnson is chairman of Risk Capital Partners.

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