How private equity swallowed Rockpool

Neil Perry doesn't want to end up "a penniless chef" like some of his mentors.

"There were all these great chefs who had no security in their future or financial stability," he says.

Chef Neil Perry (right) and Rockpool Dining Group chief executive Thomas Pash at Sake restaurant in Sydney. Credit: Wolter Peeters

18 months on from an unprecedented deal which saw the high profile chef sell his restaurants to the Quadrant Private Equity-backed Urban Purveyor Group for a reported $65 million, Perry has the security that his mentor Mogens Bay Esbensen didn't have.

"One of the things I love the most is it actually gave those people who work in restaurants a monetary value to it, you can have an exit strategy," he says. "I have helped prove that restaurants can be invested in."

The private equity deal

The deal with Quadrant created the Rockpool Dining Group which has continued to grow from Perry's stable of 13 restaurants to a dining behemoth which employs 3500 people across 57 venues.

The sheer pace of this growth has led to speculation around the performance of Rockpool and so Perry and Rockpool chief executive Thomas Pash have agreed to provide a rare glimpse into the financial performance of the group.

Rockpool has grown through a rash of new openings and the acquisition of Barry McDonald's Italian restaurant group Fratelli Fresh so it now covers a range of brands including Jade Temple, Rockpool Bar & Grill, Rosetta, Spice Temple, Saké, Munich Brauhaus, The Bavarian and Burger Project.

Since Quadrant's investment Rockpool has launched 15 new venues and is on track to launch a further 15-20 over the next 12 months.

The high cost of Rockpool's restaurant opening spree is reflected in the group's annual reports which show a loss of $20 million in 2016 and a loss of $29 million in 2017.

There have also been closures with Rockpool shutting the doors on Fratelli Fresh in Potts Point in Sydney,  its Sake Jr restaurants and a Burger Project in shopping centre Melbourne Central. Perry's flagship restaurant, the original Rockpool restaurant which was renamed Eleven Bridge, was closed by Perry and taken on by Rockpool and rebranded again as Jade Temple.

Efficiencies of scale

But Quadrant chairman Chris Hadley says Rockpool is trading well and above budget.

He is forecasting revenue of $325 million and profit on an operating costs basis of $40 million for this financial year. Revenue doubled from $105 million on  June 30, 2016 to $216 million on June 30, 2017.

Private equity has a reputation for stripping the costs out of businesses and running them hard but Hadley says he is more focused on consolidation.

Jonathon Pearce, Justin Ryan, Alex Eady, Chris Hadley and Marcus Darville from Quadrant Private Equity. Credit: Daniel Munoz

"I don't think we strip costs, we take out costs by creating a scale group just so you get efficiencies," he says. "We have invested over $250 million building the group and have another $30 million in balance sheet capacity for further investment."

Perry says he is happy to have private equity on board and he was tired of constantly having to look for funds.

Perry has been lauded as one of Australia's top chefs since he first took over at Barrenjoey restaurant in 1982. He opened Rockpool in 1989 going on to scoop Australia's top accolade of three chefs hats, the pony tailed chef has also published numerous cookbooks and has a long-standing relationship with Qantas creating menus for the airline since 1997.

"Capital is an issue for every business, most definitely getting it and holding onto it," Perry says. "Banks will give you an umbrella and as soon as it rains, take it away. We were continually raising money and paying loans back and that sort of thing. You talk to any small business operator, you have to put your life on the line every single day."

Perry and Pash are enthusiastic about the benefits of running a restaurant conglomerate.

Rockpool's head office of 70 people provides support for all the restaurants in the group including marketing, technology systems and a centralised reservations platform.

"Where we see the best investment is procurement in terms of suppliers," says Pash. "We go through 50,000 hectolitres of beer a year, $35 million in red wine and $30 million in cocktails and obviously our protein numbers are sizeable."

However, one synergy that isn't in place is central kitchen facilities with Perry saying it works best for each individual restaurant to have production in-house.

Avoiding McDonald's and Wagamamas

Perry and Pash are cognisant that they must maintain Rockpool's reputation for quality even while churning out burger outlets and beer halls.

"How do you avoid being a McDonald's or a Wagamamas?," Perry says. "It gets back to that people question ... it is great to think big but they need to think small - they lock into their customers and their community and really work hard at being relevant."

Despite the focus on people, Rockpool has suffered from key staff departing such as chef Phil Wood who left Eleven Bridge when Perry closed it.

The relationship between Perry and Pash has also come under scrutiny.

American chief executive Pash has worked in hospitality since he was 14 and worked his way up to managing $2 billion real estate investment trust NorREIT by the age of 30.

One industry insider describes the relationship between the pair as "toxic" and Hadley concedes there were "some initial creative differences" between Perry and Pash.

However, when this is put to them, the pair maintain it was just a case of getting to know each other at the start.

"We work together really well and we are very keen to see the fruition of Rockpool Dining Group as being one of the real power houses not just here in Australia but really in world," Perry says.

Chef Neil Perry says he was sick of looking for funding. Credit: Wolter Peeters

While large restaurant groups across multiple formats like Darden Restaurants in the United States have succeed overseas, what Rockpool is doing is unique in Australia.

"It's definitely challenging," Pash says. "The labour percentage and the high rental rates make it challenging compared to other markets."

Looking for an exit

Next on the agenda for Rockpool is overseas expansion with an opening in Los Angeles or Singapore but looming over the restaurant group's future is Quadrant's exit from the business either through a sale or initial public offering.

"The reality is our owner's typical hold of a business is two to three years," Pash says. "So their hold is typically of a pretty short duration."

Last year Pash told Fairfax Media Rockpool planned to be a $1 billion listed company by the end of 2018 and a “a two, three, four-billion dollar company over the next five to 10 years”.

Asked if this was overly optimistic Pash says "we are still on course for that but we have always targeted 2021 to get to that number".

While rumours have circulated that Quadrant is trying to offload Rockpool, Hadley denies this and says it is "totally focused on opening a significant pipeline of new restaurants".

Hadley says media reports of a $500 million asking price for Rockpool are "completely incorrect".

"All of our assets are for sale every day of the week but the reality is we have to build the group to a position we think optimises it on behalf of our unit holders," he says. "We haven't had the period of time to deliver what we need to deliver on our investment thesis."

Hadley says Quadrant has received pitches from investment banks on listing Rockpool and a sale or IPO is likely to occur "some time next year, we haven't got a definite date".

When Quadrant does exit, Perry says it will be business as usual at Rockpool.

"It would be more shocking if they stayed in the business," he says. "The time will come. It is just a matter of when, not if."