Do private equity funds make bad chefs?


July 15, 2014

The Economic Times

Mumbai, 15 July 2014

When global private equity (PE) fund New Silk Route paid Rs 100 crore to buy 80 per cent of Vasudev Adiga’s in April 2012, the idea was to take the Bangalore-based food chain national. Instead, this May, NSR and Vasudeva Adiga, the original promoter and a significant minority shareholder, ended up in Company Law Board.

Vasudeva Adiga alleges NSR was illegally trying to remove him as managing director, while NSR says the promoters were hurting the company by overstepping their operational brief and undermining the professional CEO. The Company Law Board has, for now, appointed an independent administrator to run the business.

An uneasy calm also prevails at Sagar Ratna Restaurants, the south-Indian food chain based in New Delhi. Here, too, the original promoters and a PE fund are locked in a conflict whose ingredients are similar to the Adiga’s-NSR spat. And, before Adiga’s and Sagar Ratna, there was Nirula’s, which was once the sole symbol of fast-food in Delhi, and PE fund Navis Capital.

These three failures to cook up a good deal in the restaurant business beg the larger question: do PE investors make bad chefs? The answer is both ‘yes’ and ‘no’. It’s a dichotomy that is rooted in the nature of the restaurant business and the players involved, and it flavours every aspect of that engagement.


PE has invested $500 million (about Rs 3,000 crore) via about 25 deals: for example, CX Partners in Barbeque Nation; TVS Capital in Om Pizza (Papa John’s) and Indian Cookery (Yellow Chilli restaurants); Sequoia Capital in Faaso’s; ICICI Venture in Devyani International (Pizza Hut, Costa Coffee and KFC chains); and Aditya Birla PE in Olive Bar & Kitchen.

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. Officials of both sides in those two conflicts declined to participate in this story.

Both those deals have seen happier days. It was in 2010 that India Equity Partners (IEP) paid Rs 180 crore to buy 75 per cent in Sagar Ratna. The charges and counter charges followed.

Roshan Banan, who belongs to the original promoter group, says IEP is incompetent at running the business. “We have been observing that the business has been receding on many counts, including quality, customer satisfaction, franchisee satisfaction, profitability and growth of the business,” he wrote in a letter to IEP and its investors in August 2013. Further, he asked IEP to sell the business back to the promoters.

IEP alleges the promoters are violating a non-compete agreement and harming the Sagar Ratna business from the inside. Both sides have filed police complaints and are also fighting in court. The spat aside, according to a former official of Sagar Ratna who did not want to be identified, IEP under-estimated the unorganised nature of the business. “They could not manage the vendors and the suppliers,” he says. Then, he goes on to outline a challenge for every player. “A sizeable portion of the busi ..


Growth and value, the two outcomes that PE funds chase, have been the casualties. It’s making them anxious, more so since many of them entered when the economy was motoring along at 7-9 per cent growth and valuations were high.

According to Bharadia, timing is the main reason why PE has not made money. “Due to recession, eating out spends were the first to be cut, while key costs such as food, staff, rent and energy kept rising,” he says. “It proved to be a double whammy for the industry.”

Navis Capital picked up a controlling stake in Nirula’s for Rs 100 crore in 2006. The capital infusion saw the company turn profitable. But soon after, it started missing expansion targets, straining relations between promoter Samir Kuckreja and Navis.

“Till the time the business was turning around and the plans were in place, the PE fund was a happy investor,” says a former senior official of Nirula’s, on the condition of anonymity. “However, when the company missed targets, boardroom fights became common.” Navis forced Kuckreja out, bought out the remaining stake and, in 2013, sold the business to A2Z Excursions for an undisclosed amount.

Simultaneously, it also rushed to standardise food and processes, and corporatise contracts. “Expansion at a break-neck speed, bringing in a professional chief executive, did not work,” says a person with knowledge of the issue. Two years on, Adiga’s has 24 outlets, of which 21 are in Bangalore.

Devangshu Dutta, chief executive of Third Eyesight, a consulting firm focused on retail and consumer products, points out the dichotomy in play for quick-service restaurants (QSRs). They need standardisation of products and services to deliver a consistent consumer experience and to scale up. They also need an entrepreneurial hand. “For a PE fund, a minority stake model in QSRs can work well where a committed entrepreneur is already in place, and the fund can provide adequate capital and other support,” he says.

With investor interest in restaurant, fine dining and QSR companies remaining brisk as ever, this is an engagement that will define many of these deals.

(Published in The Economic Times.)