To sell or not to sell? From private equity investment to IPOs, fashion businesses need to consider their individual goals to find the best option to suit them.
M ention the name SuperGroup in City circles, and eyes widen. The company, which owns young fashion brand Superdry and retail chain Cult, has become the poster boy of the FTSE 250 since its March IPO, when it floated at 500p a share and rocketed in value.
As Drapers went to press, the company had a share price of 1,107p and a market capitalisation of £879m, making it the highest riser in the FTSE 250 from float to date. No wonder founder and chief executive Julian Dunkerton is happy. “I enjoyed the whole process,” he says. “It’s done everything I could have possibly hoped: we have happy shareholders, happy staff and, most importantly, the structure to grow.”
For Dunkerton, who started SuperGroup on a market stall, floating was “not as hard as you’d think” and has made little difference to the way he runs the business. He doesn’t recognise the complaints of public companies that feel the City pushes them into short-termist decisions. “I wanted a partner who has a long-term understanding of what my company is about. The City has provided exactly that,” he says.
Arguably, that is because SuperGroup is on the up and up, but Ted Baker boss Ray Kelvin is similarly enthusiastic about his firm’s listings. “Being public forces us to focus. If we are going to do something, we need to be able to explain it,” he says.
Two sides to the tale
For all the positive tales there are just as many unhappy ones, however. French Connection didn’t get quite the “long-term understanding” from the City that Dunkerton describes. It floated in 1986 and enjoyed major success with its FCUK campaign in the early 2000s, but then shares plummeted, from almost 500p in 2004 to as low as 29p late last year.
The share price stood at 50p as Drapers went to press. Department store chain Debenhams, which listed, delisted and then listed again between 2000 and 2006, has also left some City insiders sceptical.
But floating is just one of a range of options for fashion businesses looking to raise investment in any case. For smaller companies, and those wary of the exposure a listing brings, private equity is another viable option.
The economic downturn brought a lull in private equity-backed deals, partly because they were forced to rethink their fast turnaround strategies, but their appetite for mergers and acquisitions of fashion businesses amid slowing sales is returning. On Tuesday this week, outdoor retailer Blacks Leisure appointed corporate advisory firm McQueen to handle a potential sale after receiving a number of unsolicited approaches from private equity investors and last month private equity firm HgCapital resurrected the consumer division it disbanded 18 months before.
“People are swooping on troubled businesses, but there has also been plenty of private equity appetite for good [fashion business] assets this year,” says Roger Holmes, managing director of Change Capital Partners, which backed the £105m MBO of branded young fashion chain Republic in 2005 and sold it to US private equity firm TPG for £300m in June this year.
“The best opportunities are limited. [Target] companies have to combine resilience through the downturn with a very significant growth story. Republic is a classic. There was a clear way of rolling it out.” The chain now has 105 stores.
But what worked for Republic doesn’t work for every business and can prove frustrating for the founders, who may feel the business they created is being stretched at the expense of longevity.
Tanya Sarne, who founded premium womenswear brand Ghost in 1984, feels the brand lost its way after she sold two separate minority shares in the company to retail entrepreneur Kevin Stanford and the Icelandic investment firm Arev’s Kcaj fund in 2006. Sarne hoped the deal would fund the rapid expansion of its retail operation. The two minority stakes added up to a majority one and six months later Sarne departed. “It was like a bereavement. I built Ghost up from nothing, with nothing, so parting company with it was hideous,” she says.
Interestingly, Dunkerton considered selling to private equity before taking the IPO route, but was put off by the intense pressure to deliver fast results. “Private equity investors are always looking for a bargain, and they are short term,” he says.
It’s a rule of thumb that private equity companies acquire businesses with a view to selling them within three to five years, but most deny they are just in it for short-term growth. “It’s a common misconception that we will bleed a business dry,” says Martin Clarke, head of consumer at private equity giant Permira, whose portfolio includes Valentino parent and Hugo Boss majority shareholder Red & Black Lux. “You have to leave something on the table for the next buyer so want businesses with inherent growth potential. A lot of fashion brands grow up in a very entrepreneurial spirit and we want to harness that, but often [the founders] need help growing to the next stage.”
Right people for the job
That help can be about identifying efficiencies - from centralising key business functions to cutting manufacturing costs - but it can also be about attracting talent. “If you are a smaller retailer you need to be investing in execution skills,” says Shani Zindel, partner at Isis Equity Partners. “Private equity firms have access to professional people.”
Only last week, Lion Capital, which has an investment in the publicly listed US retail chain American Apparel, enticed management guru and former Blockbuster executive Tom Casey to lead an operational overhaul of the business. In June, Marco Capello, a veteran investment banker and co-founder of private equity house BlueGem Capital, finalised its acquisition of premium London department store Liberty, then anointed himself chairman. Most private equity companies insist on a board position for one of their own executives, ensuring a strong hand on the tiller.
There are exceptions, of course. Omar Kayat, investment manager at Graphite Investment Capital, the private equity company behind footwear retailer Kurt Geiger, says Graphite’s executives will be “active” in board meetings but it has a policy of not appointing its own staff as directors of the companies it acquires. “There is a potential conflict of interests if you are both a director and a shareholder. It’s cleaner this way,” he says.
Cultural fit is crucial. “Sellers have to think not only about the size of the cheque but ‘do I want these people at my boardroom table’,” says James Murray, of private equity firm Bridgepoint. Sellers must seek backers who understand retail and beware of being loaded with too much debt, he adds.
Here too lies many a cautionary tale. American Apparel is one of a string of big-name retailers to have felt the burden of major debt repayments in recent months and risked breaching covenants. It has renegotiated its terms with Lion Capital as a result, saving it from the fate of footwear retailer Faith, which went into administration. Faith found a new incarnation, but the experience put it under tremendous strain.
“At a basic level, anyone can write a cheque,” says Oliver Mayer, partner at Duke Street, the private equity firm behind Channel Islands franchise group SandpiperCI. “As a private equity firm you need to recognise retail is cyclical. As a seller, you’ve got to ask whether your backers have the commitment and wherewithal to ride out the storm.”
How to find your perfect partner
Thrash out how you balance the integrity of the brand with global domination
If investors do the dirty, are you protected by your shareholding?
Does your investor have form in building businesses and attracting staff?
An investor that gets the cyclical nature of retail will help you grow and be more understanding when figures are down
Do you want your investor to be involved in the operations?
Pass on plan
You might like the investor that is courting you - but will you like the investor that courts them in three years’ time?