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August 27, 2014

Why PE investors should stick to minority investments in Restaurants

From an Economic Times article titledd "Do PE firms make bad chefs?" citing the problems at Adiga's, Sagar Ratna and Nirula's.
Prudent investment metrics back PE's thinking in grabbing pieces of the Rs 1,00,000 crore Indian restaurant industry. The industry is growing at a brisk 20 per cent a year. But, only about one-seventh of the industry is organised, says Technopak Advisors. And even some of that suffers from a hangover of its unorganised past, where cash deals were the norm, where contracts were a matter of spoken word and where much pivoted around the promoter.

It was in this complex concoction that restaurant promoters and PE shook hands. Promoters wanted PE capital to grow. And PE came in with the understanding that the path to that growth flowed through processes, standardisation and corporatisation -- essentially, organising the unorganised. A critical factor in this transition is promoter buying.

"The promoters should continue to run the business and help 'institutionalise' it, from a promoterdriven company to a process-driven one," says Ashish Bharadia, senior consultant at Mahajan & Aibara Consulting, a management consultancy specialising in hospitality and real estate. "The F&B (food and beverages) business is highly prone to leakages and wastages. Therefore, in the absence of 'promoter at the cash counter', adequate systems need to be in place." At both Sagar Ratna and Adiga's, even as PE started improving systems, their relations with the minority promoters began to deteriorate.

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