Many of our fashion clients who are keen to grow their business often ask us on the merits of seeking investment from the private equity community. This is a well trodden path – fashion brands which have received private equity investment include the parent company of Dr. Martens, which along with New Look 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 received private equity backing.
Before embarking on this route, it is worth considering two important points. Firstly, what do private equity investors look for in a fashion brand? Secondly, what are the factors to consider when choosing the right private equity investor?
Word of caution – throughout this article we refer to private equity investors, but of course there are other types of investors (such as venture capital funds). For shorthand, we have used the term ‘private equity investors’ as an umbrella term and includes other such funds.
Our experience is that the following factors (amongst others) are key in the attractiveness of a fashion brand to a private equity investor:
- Exit – once a private equity firm has invested in a fashion brand, they will be aiming to sell their investment within a specified time period (usually within 3-5 years from the date of making the investment). Such a sale is usually effected by either a trade buyer purchasing the company, the private equity fund selling their investment to another private equity company, or by the fashion brand going public and listing its shares on a stock exchange. Fashion brands not keen to embark on such a journey in the medium term will be of little interest to private equity funds.
- Return on Investment – private equity funds are also looking at fashion companies which will generate a substantial return on their investment (i.e. the amount they receive from selling their interest in the company should be at least 3-5 times the amount that they initially invested). For this reason, the future financial performance of the company will be essential –fashion brands can position themselves well in beauty parades for investment by having good cash-flows and modest external debt.
- Product Proposition – clearly key to the success of a fashion brand is the marketability of the wares that they are selling. Therefore, private equity funds are especially fond of fashion companies that sell good quality products which are backed by strong brands (with the fashion company having taken the necessary legal steps to fully protect the brand). Further, fashion brands which have a robust e-commerce presence, and have potential for international expansion, are of great appeal for many private equity investors.
- Management – companies in general are seldom successful unless they are run by a capable and committed management team. Private equity funds will want to know that they are investing in a company which is well organised, and lead by a team who can be trusted to take the company from strength to strength.
Choosing the Right Investor
Before accepting a cheque from a private equity investor, it’s worth thinking about the following:
- Not just about the cash! – it’s important to think beyond just receiving the investment from the private equity fund. These are people who your business will have to partner with and report to going forwards. Therefore, just like hiring an employee, it would make sense to only accept investment from a fund which you would like to work with going forwards.
- Value add – not all private equity funds are the same – for instance some have a better sector focus/understanding than others. Further, different funds will provide varying degrees of strategic and management input. Some will also have better contacts and be able to open more doors to retailers/suppliers than others. Potentially, such value adds are worth their weight in gold, and may be of more value to the company than simply receiving the initial investment from the private equity fund.
- Investor Director – often a private equity fund will appoint one of their officers to be a director of the fashion brand. This means that they are entitled to attend and vote at directors’ meetings, and are to be provided with the same information that is given to all of the company’s directors. The presence of such an investor director can be productive, as they can offer advice and guidance. However, if the relationship with the private equity fund sours, then the company will have a difficult and potential dogmatic director on its board, which can of course be problematic.
Although many fashion brands have received private equity investment, as you can see from the above, it is clearly not a model which works for all. Also, it is pertinent to consider from whom a fashion brand wishes to receive private equity investment – as with matchmaking, one should always endeavour to find a good fit.