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Private equity's love-hate relationship with fashion

Critics see private equity investment as the “kiss of death”, but for some fashion retailers it can be life-saving. 

debenhams blackpool

Debenhams was under-invested by former owners Texas Pacific Group, CVC and Merrill Lynch

Private equity investment has long been a catalyst for growth in the fashion retail industry. However, as tough trading conditions have continued, many retailers with a history of private equity backing have struggled, among them Jack Wills, Debenhams, Bonmarché and LK Bennett so far in 2019. This has compounded a perception long held by some in fashion retail that private equity investment can be “the kiss of death”.

Private equity investment is medium-to-long-term finance provided in return for an equity stake in a company, outside a stock exchange. A private equity firm will sometimes buy out a company outright – and the founder will then decide whether they will stay on and run the business.

Other private equity strategies include buying out the founder, cashing out existing investors, providing expansion capital or providing recapitalisation for a struggling business. Nevertheless, the fact remains that private equity is always looking for a return on investment, and that will drive its interest in any business, be it in fashion or other sectors. 

For the target business, the obvious benefits of a cash injection and new management expertise can be offset by a lack of knowledge about fashion retail and the history of a brand, and narrow focus on return on investment. 

Going cold

Despite plenty of historical investment, private equity interest in retail appears to be cooling (box, below). Research compiled for Drapers by private equity and venture capital database PitchBook shows 33 private equity retail deals were finalised in the UK in the year to 31 December 2018, worth a combined £3.59bn – down 12.4% from 2017.

“My guess is that 2019 will be a much softer year for private equity in retail than 2016 [before the Brexit referendum],” says Tim Hames, director general of the British Private Equity and Venture Capital Association (BVCA). “People are more cautious, more careful and the Brexit cloud doesn’t help things. Nervous sentiment, rising staff costs and business rates, and the impact of online are all arguments for being cautious about new retail investment.”

Private equity’s fashion retail successes and struggles

Debenhams Texas Pacific Group, CVC and Merrill Lynch paid £600m for Debenhams in 2003. Following a lack of investment and huge borrowings, the investors exited with bumper profits, while the chain was left with £1.2bn of debt 

Jack Wills BlueGem Capital Partners is searching for a buyer for the retailer, in which it will retain a minority stake

Jaeger Backed by Better Capital until 2019, Jaeger’s trademark and debt was bought by Edinburgh Woollen Mill Group when it went into administration in April 2017

Bonmarché Backed by Sun Capital from 2012 to 2019, and now majority owned by Philip Day, the retailer has issued three profit warnings in six months

Joules Joules grew ecommerce and international stores under the ownership of LDC until 2016

Kurt Geiger After more than four different private equity owners, current parent Cinven is interested in expansion in the Far East, which is working well so far 

Mountain Warehouse Owner Inflexion has a executed “very swift and well-managed expansion” in the UK for the outdoor chain

Dr Martens Has grown internationally and developed online expertise under Permira 

Matchesfashion Has evolved from a bricks-and-mortar retailer to 90% of sales online and 85% outside the UK under Apax Partners

Nigel Walder, a managing director at Bain Capital Private Equity, agrees: “There has certainly been a reduction in the number of auctions for companies and activity in retail as a whole. It boils down to a sector that is going through enormous amounts of disruption, and that provides both opportunity and risk. “New media models are removing barriers to entry: ecommerce, discounting and private label are disrupting many of the larger and more established retailers.” 

Retail blind spot 

Critics maintain that the traditional private equity model has no place in retail.

Property services firm Knight Frank’s A Price of Change retail report, published in April, argues that most operators that have launched a company voluntary arrangement or gone into administration in recent history have been backed by private equity, or bear onerous debt from historic private equity ownership, such as Debenhams. Retailers should be run by retailers, the report insists.

“[Private equity] can have a reputation for having a singular focus on very short investment horizons,” says Matt Truman, CEO and co-founder of retail and consumer investment company True.

“This can saddle unsuitable brands with debt, impacting operational decisions and restricting investment because of weaker capital efficiency that usually fail the end consumer [through lower-quality product or poorer service], and ultimately making long-term profitability unsustainable.”

kurt geiger london

Kurt Geiger is expanding in the Far East under Cinven

One fashion retail consultant says: “The issue with private equity and investment in the fashion industry is that, in the current difficult trading environment, investment needs to be substantial, and for the long term; and long-term, patient, constant and expert support of the management team of a business investment is not necessarily what private equity is known for.

“There are no ‘low-hanging fruits’ or quick and easy solutions to produce relatively swift returns for private equity these days as perhaps there once were. Substantial investment is required in technology for both ecommerce and bricks and mortar, and this needs to be ongoing, given the heightened competition and speed of change.”

Erica Vilkauls, former CEO of LK Bennett, which was previously owned by Phoenix Equity Partners and Sirius Equity, agrees that the list of failed private equity-backed fashion businesses in the UK is “fairly long”: “The ones which have failed seem to be those whose management teams suddenly become retail experts overnight, plus those who have not wanted the founders and chief creatives in the business once they have taken over – an immediate kiss of death.”

Positive force

However, Vilkauls believes there is a place for private equity investment in fashion retail: “Traditionally private equity invested in asset-heavy retailers [bricks and mortar] and now will look to the more ‘asset-light’ retailers that don’t have a huge portfolio of expensive real estate. A brand with a unique proposition, which has a clear place in the market will always be of interest, especially those not yet fully exploited globally or digitally. Brands that do not rely on getting fashion trends spot on are more likely to succeed with private equity backing.”

She points to the example of Canada Goose, which is owned by private equity firm Bain. 

“[Canada Goose] has a strong brand identity and a unique niche. It made a practical garment fashionable but remained true to its principles of quality and ‘doing the job it was originally made for’. With help from Bain to grow, they were able to go public on the Toronto and New York stock exchanges and have continued to grow.”

Indeed, proponents point to the many success stories, such as Joules, Kurt Geiger and Mountain Warehouse

Kien Tan, retail strategy director for professional services firm PwC, says: “Private equity is not the only reason, or even the biggest reason for a company’s downfall: it often takes the blame for that.

“Liabilities that currently weigh heavily on their balance sheets are a result of PE-ownership during the financial crisis [2007/8] and a debt-backed period of aggressive store expansion. Many over-expanded, but it also comes down to how they navigated the choppy waters and recognised changing consumer needs during this period.”

mountain warehouse durham

Mountain Warehouse is expending under the ownership of Inflexion

Truman agrees: “The well-publicised challenges that have faced some of the major high street retailers over the past couple of years could lead to the misconception that retail is a troubled place for potential investors.

“However, the structural shifts in the sector, typified by changing consumer habits, mean that new opportunities to invest are springing up in all kinds of categories through new and unique business models – whether that is the discount, mass or premium side of the market. People forget that retail is very inter-generational and by definition, is constantly changing.”

In the middle

Recent private equity-backed success stories could start to whet investors’ appetites for retail again once there is more clarity surrounding Brexit.

The managing director of one private equity-backed footwear retailer says: “Mid-market retailers should continue to seek private equity backing. The sector has been going through a lot of change, but there will soon become some harmony between online and offline, and opportunities will arise for these types of retailers.

“People like to invest in technology because there will always be a place for that. This is where mid-market retailers should play, to make them attractive to backers.”

Hames adds: “It wouldn’t surprise me if solution investors return to the middle market next year, after the Brexit scenario becomes slightly clearer.”

“Private equity has many advantages,” says PwC’s Tan. “Companies have fewer people to answer to because they don’t have to report to the stock market or publish quarterly figures.

“As well as cash, it can also offer expertise to support businesses in a much more meaningful, relevant and focused way. This can be technical help or advice on how to expand the business globally.”

The former CEO of one formerly private equity-backed womenswear retailer says: “Private equity introduces a level of leverage that’s probably higher than businesses would have taken on under their own steam.”

Clare Kennedy, a director of retail at turnaround consultant AlixPartners, concludes: “Fashion as a sector most certainly presents opportunities and indeed one can construct a strong argument that in today’s environment the discipline and rigour many private equity investors bring to the table are sorely needed as many retailers struggle to manage costs and invest in the platforms needed to stay relevant to their customers. The part that is harder than ever is picking the right horses to back.”

Fashion retailers are right to be cautious. Although private equity can bring hefty cash injections and fresh and technical expertise to the table, retailers need to ensure a long-term view and a clear, innovative retail strategy to avoid the much-feared “kiss of death”.



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