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The public face of private equity

With the private equity industry facing criticism from unions and politicians, is venture capitalist cash still on trend with fashion retailers?

The chief executives of private equity-backed retailers SRG and TJ Hughes left this month after management shake-ups at the two groups. And with the Treasury Select Committee and trade unions grilling the private equity industry following accusations of short-termism, could the appeal of private equity finally be wearing off?

The benefits for investors are clear - namely the returns made once the company is sold on, typically after three to five years. New Look, bought by private equity firms Permira and Apax in 2004 for EUR1.3 billion (£880 million), is understood to have attracted offers of between £1.6bn and £1.8bn from several private equity bidders.

However, the experience for management and staff at the retailer can be uncertain. Menswear group SRG and discount chain TJ Hughes felt the brunt of this when chief executives Adrian Wright and Robin Dickie exited the respective businesses last month, after sluggish performance.

When PPM Capital, then called PPM Ventures, backed a management buyout of TJ Hughes in 2003, the private equity firm cited a strong track record of achieving significant sales and profitability growth in the previous two years. Dickie was appointed as chief executive soon after the buyout, but he departed earlier this month after a recent slowdown in sales. He has been replaced by former Rosebys boss Sue Tennant, making her the chain's third boss since the buyout.

This uncertainty has been cited as a major downside of private equity investment. But on the flipside, it can give retailers the cash boost they need to achieve their potential, often through development and growth.

Americana International, which owns streetwear brands Bench and Hooch, plans to expand both labels by opening stores in key European cities. The strategy came to fruition after the group was bought by HG Capital this year for £190m. Head of consumer and leisure Richard Mathews says: "We've appointed former Umbro boss Peter McGuigan as chief executive at Americana. The move is absolutely backed by the management team there."

This positive view is mirrored at handbag and accessories brand Radley + Co, which was bought by Phoenix in 2006. Chief executive Roger Best says the result has been refreshing. "Private equity investment creates wealth at a faster rate than at a public business," he says. "There is less bureaucracy and less chasing targets, and more long-term thinking than in a public situation."

Northern Ireland-based shirt manufacturer Glenaden is another retailer that says private equity is allowing it to reach its potential, after Amicus Capital bought a controlling stake in November last year. Managing director Andrew Lowden says: "It's important that investors understand how the business works, rather than just bringing money to the table. Then you get the double hit of having more heads at the company, as well as the financial backing."

For womenswear chain Hobbs, which received investment from Barclays Private Equity in 2002 and from 3i in 2004, the cash injection was a matter of survival. "If it hadn't been for private equity we wouldn't be here today," says chief executive Nick Samuel. "It was absolutely crucial in giving us funding for the business when the family shareholders wanted to move on and retire. It was the way to take the business to the next stage."

Prior to investment, the company owned 30 outlets. It now trades with 111 outlets and recently reported a turnover of £94.7m.

Some retailers, unions and politicians remain sceptical, claiming investors are often too keen to strip assets and kick out management while benefiting from cushy tax rates. But private equity firms maintain that backing the existing team at a retailer is paramount to a deal, saying that changes are made only if performance slides. "Reshuffles are not as common as people like to believe," says a spokesman from one private equity firm. "If you've done your homework, they shouldn't happen. But as a major stakeholder, you reserve the right to supplement the skills that are already there."

Compared with other sectors, fashion retail is highly attractive to investors because it is so cash-generative, but it is not without risks. "It's all about the potential rewards," says Mathews. "Retail is high risk for private equity and within that fashion retail is even higher risk. This is because demand is volatile." Despite this, Mathews says fashion retail deals are on the rise mainly because so many have been extremely lucrative.

Investors do not believe that the recent criticisms of the industry, which led to the resignation of British Venture Capital Association chief executive Peter Linthwaite last week, will have a negative impact on future deals. The focus of any review is likely to be on the level of taxation on the gains from deals.

Lowden says investment can benefit both parties as long as businesses ensure the deal works in their favour. "You need to discuss the strategy before you do a deal, and retain enough control to make sure you will still be involved day to day," he says. "Otherwise there's not a lot you can do if the investors change their minds. But you can work out pretty quickly if investors don't have the right attitude."

BIG DEALS: FASHION'S PRIVATE EQUITY ACQUISITIONS

Hobbs

Turnover: £94.7m

3i acquired a 63% stake in 2004 for £111m from Barclays Private Equity, which backed a £30m management buyout of Hobbs in 2002

Limeys

Turnover: undisclosed

Acquired by Arev-backed fund KCAJ from administrative receivership this month. Arev bought Cruise for £7m last September

Fat Face

Turnover: £111m

Advent paid £100m for the business in 2005. It was then acquired by Bridgepoint in May this year for £360m

New Look

Turnover: £1bn

Taken private by Permira and Apax in 2004 for £700m. The two firms have a 60% stake in the business

Americana International

Turnover: £70m

HG Capital bought it for £190m in March. ISIS Equity Partners backed a £20m MBO in 2003

Glenaden Shirts

Turnover: about £4m

Amicus Capital acquired a controlling interest in November 2006 for an undisclosed sum

TJ Hughes

Turnover: £6.4m

JJB Sports paid £44m for the business in 2002. It was then acquired by PPM Capital in 2003 for £56m

Radley + Co

Turnover: £41m

Phoenix acquired a majority stake in February 2006 for more than £40m

SRG

Turnover: £73m

Gresham backed a £30m management buyout in November 2005.

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