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Can fashion continue to win private equity confidence?
Matchesfashion.com recently sold a majority stake in the business to private equity fund Apax Partners. Matchesfashion.com is understood to have made choice investment in its technology and design aspects of its business, launching new services (including delivery within 90 minutes to London shoppers) and having a notable reputation for solid customer service. Arguably it has been ahead of the curve in terms of the online channel. Certainly Apax saw value in the potential to grow even further.
Despite consequential controversies, Agent Provocateur was sold by 3i to Mike Ashley only after a bidding war with private equity house Lion Capital. There are also numerous reports that Burberry has rejected takeover approaches and Coach is said to be looking at M&A further to its strategic acquisition of the luxury footwear brand Stuart Weitzman.
On the other hand, Sun European Partners has incurred certain financial difficulties since adding Jacques Vert to its’ portfolio. Better Capital acquired Jaeger in a deal worth £19.5M but failed to rectify the loss making business. It has since faced questions from creditors about the collapse of Jaeger.
What is the case is that private equity tends to be more willing than trade buyers to stake money on developing fashion businesses. Private equity financing offers a lot to fashion including specific sector experience and international expertise.
So what is it that attracts private equity to fashion? Whilst each deal is distinct, certain themes crop up regularly;
- perceived structural inefficiencies within the brand;
- over-rented real estate portfolios;
- opportunities for acquisition of under-capitalised rivals.
From the perspective of the target fashion business, investors whose exit horizon is at the longer end of the typical private equity model (5-7 years +) and who can bring sector-experience management to facilitate careful growth, are likely to be the most sought-after partners. However, for those brand owners thinking about selling part or the entirety of a company over the next 5 years, the application of Entrepreneurs Relief enabling business owners to pay a significantly lower rate of capital gains tax when disposing of shares held in a company may not be a guaranteed prospect. The UK could experience a change in government where apparent issues concerning business tax relief are top agenda items!
It should also be borne in mind that there are inherent tensions between the traditional private equity investment model and the interest of fashion brands. Private equity investors often adopt process-and growth-focussed strategies which may not always fit easily with the traditions of cautious growth, exclusivity and creative freedom that inform the strategic direction of many luxury fashion brands. For example, whilst private equity funding can, on the one hand, facilitate rapid international expansion and fuel commensurately large returns to investor and investee, an expansion plan that is overly aggressive can risk significant damage to the brand.
Despite these tensions, private equity investors are still able to move quickly and be in a position to deploy substantial resources of capital and expertise to restructure struggling businesses.
Overall we are likely to continue to see opportunities for acquisition or consolidation both on the high street and in the luxury fashion market.