Luke Johnson: Beer & Partners
We meet the man with the cool hand that steered Pizza Express to success and has now turnedto supporting angel investing
The former Channel 4 chairman, Luke Johnson, made his name through the expansion of Pizza Express. Now the ice man has moved into angel investing, and explains to Growing Business what fuelled this move and drives his inspiration
Luke Johnson doesn’t really do small talk. Nor does the serial entrepreneur and investor seem to tolerate inefficiency or waste in any form. Sometimes, he even answers in spoken bullet-points. However, with a CV covering interests as diverse as: chairing Channel 4 and the Royal Society of Arts; building and selling a chain of dental surgeries for £100m; starting successful restaurant chain Strada from scratch and taking Pizza Express stratospheric, it’s not surprising the 48-year-old father of three is accustomed to cutting to the chase. Current pursuits include a weekly column in the Financial Times and investments spanning greyhound tracks, fashion, patisseries, restaurants and angel network Beer & Partners, where he recently became the largest single investor, with a 27.4% stake. Like many entrepreneurs, Johnson also seems to have a low boredom threshold. If your question is deemed interesting, it will be met with a courteous response. If not, he’ll fire a barbed one-liner. “Don’t invest in dying industries,” he replies, when asked what the purchase and subsequent demise of the Borders book chain has taught him. Johnson’s reputation for restlessness and a refusal to suffer fools is sometimes seen as abrasiveness, but he claims he has mellowed since starting a family. That said, during our interview at the Beer & Partners’ investment fair, he’s accommodating and engaging, despite having just flown in from the US. An interview with Luke Johnson encourages you to raise your game, and, if you are able to elicit a smile or even a slight nod of approval, you certainly feel as though you’ve earned it. An ability to remain somewhat emotionally detached fits, by his own definition, the profile of a good investor, who also needs to be rational about risk and reward, understand portfolio investing, take it very seriously and do a lot of homework, Johnson says. And he should know. His career is punctuated with successful deals, but he made his name – and many of his millions – through the acquisition, flotation and rapid growth of restaurant chain Pizza Express. It was the first sign of Johnson’s ability to spot a brand’s untapped potential and turn an underperforming business around. It also earned him the nickname ‘Cool Hand Luke’ in the City.
Johnson and his then business partner Hugh Osmond (who he met while studying medicine at Oxford) performed a reverse takeover of Pizza Express through their company, Star Computer Group, in 1992, in a transaction valued at £20m. The pair famously transformed it from a small Italian restaurant business with 12 outlets, which floated at 40p a share, to a 250-strong chain with a share price of 900p and a market cap of more than £500m on exit in 1999. Along with Pizza Express and Strada, Johnson, who was 540th on this year’s Sunday Times Rich List with an estimated fortune of £100m, has also owned and sold a number of the UK’s most successful eateries, from celebrity haunts The Ivy and Le Caprice to restaurant chain Belgo. Today, following his six-year tenure as chairman of Channel 4, which ended in January, his mid-market private equity firm, Risk Capital Partners (RCP), gets most of his attention. RCP invests in established businesses, “normally making in excess of a million profit”, says Johnson. Its portfolio of investments includes restaurant chain Giraffe, GRA Greyhound stadia and Patisserie Valerie, which has around 70 outlets across the UK. With its “high sales per square foot across the chain”, Johnson believes Patisserie Valerie is the best deal he’s ever done. So what initially attracted him to the business? “Long-established, profitable,” he lists, before adding: “I think the fact that there are so few patisseries in Britain, so few rivals, it struck me as a gap.” Like many businesspeople over the past couple of years, he has faced his fair share of challenges, too. He cites the acquisition of the UK branches of Borders as his biggest mistake. While RCP made a timely exit through a management buyout a few months before the administrators were called in, it’s safe to say the deal didn’t do wonders for his bank balance. In what seemed like a bargain, RCP bought Borders’ UK stores in a firesale from its US parent in 2007 for £10m, with a further £10m contingent on future profits, reportedly ploughing £2m into the company to turn it around. It was already taking a hit from supermarket and online book sales, but the key to Johnson’s strategy was the launch of an online retail arm and live experiences in the stores. So what went wrong? “We bought it as a turnaround thinking it was cheap, but the challenges were so great that I think it was always doomed,” he explains. “We misjudged just how powerful Amazon is and how strong the supermarkets are in book sales. Also, we bought it pre-downturn, so we didn’t see that coming, which perhaps we should have. Now there are e-books, which has put more of a strain on book-selling. I think that there are profound structural problems in book retailing. Just because you’re buying something at a huge discount, doesn’t necessarily mean that it’s cheap.”
As the third son of political columnist and former editor of The New Statesman, it’s clear Johnson has inherited his father’s talent for writing. After filing his weekly The Maverick column to the The Sunday Telegraph from 1998 to 2006, he now writes The Entrepreneur for the Financial Times. Part of Johnson’s enduring appeal as a columnist, it seems, is his refusal to walk on eggshells. While never overtly rude, he is no people pleaser. His views on issues such as incapacity benefit for those citing stress and depression (“a malingerers’ charter”) are, perhaps, unsurprisingly controversial and never sugar-coated – but often warmly received by business owners. Johnson says he uses the position to speak out on behalf of the UK’s small business owners, whose voices often go unheard. In the foreword to his book The Maverick, a collection of his finest Sunday Telegraph columns, he admits: “Few of my pieces were balanced. But I always believed the opinions I expressed were those of many entrepreneurs, who were perhaps too busy to find a soapbox, or thought debating such matters a waste of time.” Interestingly, in another piece for Management Today last year, Johnson said if he were chancellor for a day, he would ask the Queen to dissolve Parliament to form a coalition government. “Such a step would help boost confidence and provide some desperately needed fresh thinking,” he wrote. So, is the current set-up what he had in mind? “I suppose I called for a coalition then because I wanted to have a new government quicker,” he says dryly. While the idea of less state intervention and ‘smaller government’ touted by the Tories does strike a chord with Johnson, like many businesspeople, he is reserving judgement on the Cameron-Clegg alliance for now, presumably at least until after Osborne’s emergency Budget on June 22. When asked what the best thing the new coalition could do to support investment in growing businesses, his first answer is characteristically to the point: “Nothing stupid with capital gains tax.” This time, though, he is happier to elaborate: “I hope the concessions [for entrepreneurs] are very big and straightforward,” he continues. “I can live with the idea that quoted shares and second homes suffer a higher rate of capital gains, but other than that there should be no interference. Anything that looks and sounds vaguely like a business investment, such as something that could help create jobs and wealth, should suffer a far lower rate of tax, perhaps even back to 10%.” One of Johnson’s biggest bugbears is the level of red tape currently stifling small business growth. “Every business owner or entrepreneur you meet has their own war story of complete abuse of the process, and how the odds are stacked in totally the wrong way,” he says. “This is legislation passed in a different era, I think, when the automatic assumption was all bosses are villains, and, therefore, it needs to be a tilted system. That isn’t the case now. Obviously, you get some rogue employers, but people who have had a bad experience in a tribunal are the ones who are less likely to take on staff if they can outsource it to India or get a machine to do it.”
The unrepentant capitalist
Johnson’s demeanour might not give much away, but flick through his archive of columns and his passion for entrepreneurship shines through. In one offering in The Maverick, he insists that building your own company is “the best fun you can have with your clothes on”. He’s convinced entrepreneurs will drive the economic recovery, and with banks still reluctant to lend, his belief that angel investing is now the “only realistic option” for companies looking for seed funding drove his investment in angel network Beer & Partners. “Since current low interest rates give savers such poor returns, there are also more angel investors emerging that have a strong appetite for direct investment in small companies,” he says. This is a personal investment for Johnson, and fits his track record for backing established businesses, although he does make angel investments himself, too. For instance, he recently bought a stake in a “nicely profitable” artisan bread maker. “I’m hoping it will become one of the main suppliers of bread to our patisserie businesses. We bake everything but our own bread, and I wanted to have some degree of ownership of the supplier,” he says. Johnson believes a successful angel deal should give you three times your money back. But how long does it take? “No idea,” he replies, “probably somewhere between two and six years. But obviously, high risk, high reward. You can assume that if you have a portfolio of 10 firms, with some you’ll lose all you invested and you need to be very grown up about that aspect. Some will require follow-on investment. This is something that’s very difficult to judge, because quite often they might require three rounds of investment to become profitable and be self-financing. So you only put in £50,000 to begin with, and you think that’s a good deal, but then you’ve got to put in another £50,000, and another. But patient capital and stamina are often very important.”
The perfect fit
Beer & Partners was founded by the late David Beer in 1991, who “saw that traditional venture capital markets were failing smaller companies, while City advisers charged large fees at a time when their clients could least afford them”, according to the firm’s website. It is now run by chief executive Michael Weaver. The organisation stringently vets the business plans of those seeking funding, and only those that make the grade are introduced to prospective angels. “I thought Michael and his colleagues have an interesting formula that has a lot more potential,” says Johnson. “I believe in the future of angel investing, because I think there’s still a big gap that’s currently unsatisfied by institutional venture capital or the banks. It’s a segment within the business universe that interests me a lot, because I think breakthrough companies come from this stable, the sort that create profit and lots of jobs in the future, and increase our overall prosperity. So we need to encourage them through whatever means possible, including capital-raising.” The arrangement will clearly be mutually beneficial. Shares purchased by Johnson frequently rise in value purely because he has bought them, and Weaver believes that his involvement will raise the profile of angel investing. “Luke investing gives an awful lot more credibility – not just to Beer & Partners, but to business angel investing as a whole,” he says. “We’re certainly delighted to have him on board, and he’s been pushing some good projects our way already.” At the same time, it gives Cool Hand Luke a direct route to the 100-strong portfolio of small businesses that Beer & Partners works with annually. “It’s partly dealflow for me,” says Johnson, “and it’s partly just insight into what’s happening at the sort of roots level in terms of appetite for early stage investing in private companies. I’m interested in entrepreneurs, and to see the quality of the projects and the individuals that are out there. I find tales of companies that succeed very inspiring.” To wrap up our time together, I ask Johnson what he thinks makes a good investment? “There are so many factors,” he replies (in one of his columns, he compiled a 50-point checklist). “To give you a simplistic answer, it’s management, product, markets, margins, growth margin, the track record of the individuals, the scale of the opportunity, and whether it’s cash generative. Of course, some things are far more important than others, such as how good the people are. “I also never invest in companies I don’t understand or those with three years of losses in their business plan before they get to profitability. That’s too far away, and means a lot of the more adventurous, high-tech, innovative ventures probably aren’t right for me. I’m just a bit too impatient.”
Luke Johnson on his hopes for the new coalition
“I think the government has to do two things and then get out of the way. It has to deregulate and pursue tax policies that encourage investment and employment. “The government needs to stimulate entrepreneurs to take risks and start businesses, and to hire people, creating jobs. Create a job and you take someone off unemployment benefit; they pay taxes, it’s a virtuous circle. They become a productive member of society and most of the research I’ve read suggests that most net new jobs are created by smaller businesses – the innovative companies rather than the bigger ones. “Leaving aside whether as a society we don’t feel quite as well off as we did two years ago, unemployment is a real scourge, and governments can’t create jobs – not the sort of the jobs that are going to generate wealth and exports and things like that – so state intervention there is not the answer. “I would like to see intelligent policies on things like capital gains and I’d like to see some deregulation of things like employment legislation for smaller companies, because I think that’s probably the biggest single barrier for taking on staff, and most smaller companies can’t afford a HR department. “Businesses only typically get a head of HR when they have got about 100 staff or more. That means all those firms with fewer than 100 staff are vulnerable to a minefield of legislation where, if they get it wrong, they could end up in an employment tribunal. This can be very costly and result in damaging bad publicity.