Fat Face’s decision to pull its planned flotation on the London Stock Exchange received much attention. It followed fast on the heels of London based fashion retailer, Blue Inc., which also decided not to proceed with its flotation. Boo Hoo fared better, although since it went public in March, its share price has fallen. As at the present time the capital markets may not be the most welcoming place for fashion companies, what are the other avenues which may offer substantial capital injection?
Investment can broadly be split into two categories – debt finance and equity. The most common form of debt finance is a company receiving a loan from a bank, usually to fund its medium-term working capital requirements. It would be usual for the bank to take security over the company’s assets (for example, over its stock), or for the company’s obligations to be guaranteed by another entity within its group which has more assets than the borrower, and/or by a director/shareholder.
Another option is for a company to issue bonds (effectively an 'IOU'), in which lenders agree to loan it money in exchange for receiving a specific interest rate for a set length of time. The key characteristic of debt finance is that the person lending money will not receive any shares in the borrower – for this reason, debt finance is popular with many companies and has been used by, amongst others, Debenhams and New Look.
By contrast, an equity investor will give companies money in exchange for receiving a specific proportion of the shares in that company. A recent example is Cath Kidston which has agreed a substantial investment with a Hong Kong based private equity fund.
Equity investment usually takes the form of private equity, although venture capital and angel investors (who are often high net worth individuals), have been known to fund start-ups and provide early stage growth capital to fashion companies. Others – such as Archer Adams – are looking to crowd funding.
Examples of fashion brands which have received private equity investment are many. They include the parent company of Dr. Martens, which along with New Look and Hugo Boss are owned by Permira. Similarly, Moncler, Zadig & Voltaire, as well as the SMPC Group, which owns the brands Sandro, Maje and Claudie Pierlot, all have recently received private equity backing.
Private equity funds will take a majority stake in the company in which they wish to invest (which may be supplemented by the company taking on external debt from a bank), with the company’s management retaining a minority interest. The usual objective of private equity investors is to sell their shares in the company within a few years of acquiring them so as to make a substantial return on their investment. To help make this more possible, the private equity firm will incentivise the company’s management, by increasing the amount of shares held by them if certain performance targets are reached (usually linked to the company’s profits). Usually, the private equity investor will leave the day to day running of the company to management, although it will wish to have an observer/representative present at board meetings. It will also request the ability to step in (and exercise control) if there are significant changes affecting the business, which may potentially threaten the value of their investment.
Drivers for Private Equity
For fashion companies keen on receiving private equity investment, it is worth asking the question ‘what are private equity investors looking for?’
Unsurprisingly, as noted above, private equity funds are looking to invest in companies which will enable them to make a substantial return on their investment within a relatively short period of time. Typically, they will invest in companies which have a good cash-flow, and which are selling high-quality products much in demand with consumers. They are also attracted to companies which have a capable management, and have sound organisational structures in place, unlike banks, who tend to focus more on the security angle.
In summary, flotation is not the be all and end all. Other ways exist for a fashion company to receive investment. There had been speculation that the Hut Group would float on the stock market but instead it looks like a stake will be taken by private equity group KKR. In addition, the examples set by Permira’s investment in Hugo Boss and New Look show that private equity houses and fashion companies can work together, and that with management sufficiently incentivised, there is potential for both sides to make handsome returns.