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Playing the private equity game

Why do private equity investors always enter a room backwards? So they can keep their eye on the exit. So goes the joke that's been circulating the City for many years now. So it should not come as much of a surprise to learn that Permira and Apax are considering the sale of fashion chain New Look just three years after they bought it.

Unlike dogs, private equity groups are not for life. Their recognised modus operandi is to buy a business as cheaply as possible, expand it/transform it, and then sell it on for as much as possible, as quickly as possible.

The controversy that such a practice can court centres on the often high level of debt used to fund acquisitions, leaving businesses vulnerable to interest rate hikes and accusations (such as those levelled by the unions at the private equity community this week) of stripping value out of businesses while handsomely rewarding management.

There's no doubt that some people will be handsomely rewarded if New Look fetches its anticipated price of £2 billion. Permira and Apax would net £602 million each (not bad given that the business was bought for a total of £700m in March 2004), while founder Tom Singh stands to pocket a further £410m on top of the £74m he received when the company went private.

In addition the management team, led by chief executive Phil Wrigley, could all share a payout of up to £302m.

Whatever your stance on executives being paid what for most of us is an unimaginable sum of money, it's difficult to deny the success that New Look has enjoyed in recent years.

The team could hardly be accused of stripping value out of the business. Since it was taken private, New Look has grown its trading space by 50% and is now the UK's third largest fashion retailer behind Marks & Spencer and Next. According to market research firm TNS it is now the largest retailer by volume of women's shoes.

On top of that the business is on the brink of a major international expansion drive, having just signed a franchise agreement to open 40 stores in the Middle East over the next five years. With that potential it's easy to see why other private equity investors might be interested in taking on the business, but that's not the only route under consideration.

The New Look team is also said to be warming to the idea of a flotation and will no doubt have been watching the performance of Sports Direct. Its shares began trading on Tuesday at the top end of expectations at 300p - an exercise that valued the business at around the £2bn mark. By Tuesday afternoon, though, the price had dropped to 281p. However, this must be placed in the context of a general fall in share prices that day triggered by a wave of selling across global equity markets.

One could almost feel sorry for Mike Ashley for choosing that day to go to market, if it weren't for the fact that the sum he raised from the Sports Direct float makes Singh's potential payout look like small change. Who said retailers were having a tough time?

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