Private equity executives such as Stephan Lobmeyr are having to learn a new skill at the moment: how to look inconspicuous beside the catwalk. Lobmeyr, who recently attended a fashion show in Milan, is in the throes of turning around the loss-making German fashion brand
Until recently, private equity funds gave the luxury goods sector a wide berth. This was partly because luxury goods brands can take decades, sometimes even centuries, to develop while private equity owners generally want a three to five-year turnaround. The sector can also seem somewhat flaky and irrational compared, say, to waste management, to those schooled in financial spreadsheets. Also fashion and deluxe labels tend to be led by strong and often slightly irascible personalities, who are often reluctant to give up control.
Karine Ohana, partner in Paris-based investment bank
However, private equity firms appear to have put such bad experiences behind them. They now detect plenty of opportunities in luxury goods, seeing the sector as ripe for consolidation. They also believe that many of its smaller players lack the management skills necessary to cope with the new market realities.
One reason private equity finds the sector so irresistible is because of its price inelasticity – a strong luxury goods brand can virtually name its price, irrespective of the consumer price index. Some accessory ranges, for example, make margins of up to 77%. Even in the US market, price increases in the sector continue to run at about double the pace of inflation.
This is backstopped by the fact that millions of newly affluent consumers in emerging markets, notably in China, India and Russia, are looking for ways to flaunt their wealth, and are snapping up items like Baume & Mercier watches, Louis Vuitton travel bags and bottles of deluxe Scotch whisky like there’s no tomorrow.
There’s even a view among bullish observers that the unprecedented sales growth being seen in markets like China, India and Russia might outweigh the highly cyclical nature of the market – which would be particularly useful if the summer’s credit crunch dents consumer confidence in the developed world. They also think their skills will be particularly useful when it comes to orchestrating international retail roll-outs and the development of accessory ranges – something that founder designers are sometimes not good at.
Pierre Mallevays, managing partner of
Overall the global luxury goods market is expected to almost double in size to £225bn within the next five years, according to figures from London-based
In recent years several leading private equity houses including
Unusually, Permira acquired Valentino, which itself owns a majority stake in the German mass-market brand Hugo Boss and also owns Marlboro Classics label – for its brand rather than because of its real estate. Many past private equity incursions into the sector (including Texas Pacific’s purchase of Neiman Marcus) tended to hinge on the value of the retailer’s real estate.
Permira has already installed Alessandra Faccinetti as Valentino’s creative director, which observers believe may make it easier to kill off the group’s high maintenance ‘haute couture’ lines and focus instead on building up accessories ranges under the Valentino label, an area where the company has historically lagged.
Meanwhile Apax Partners is reported to be preparing a US$3bn float of the American clothing label Tommy Hilfiger, which it acquired in a US$1.6bn deal concluded last year.
Lobmeyr believes that brands such as Jil Sander are attractive to private equity because their founders find it hard to combine good design and good economics. He says: “If you look at the history of fashion, many brands have been set up by a creative founder. But very few of them were also good businessmen capable of growing a business from £50m to £1bn of turnover.”
Permira partner Martin Clarke, agrees. He recently told The Times: “Many of these labels were run as personal fiefdoms focused on haute couture. Along the way they created fabulous brands with huge value. The challenge and opportunity for private equity is to preserve the heritage of these brands while broadening their appeal and customer base.”
For their part, many luxury goods firms – particularly the Italian ones, which have generally been more parochial and less focused on international expansion than their French counterparts – are beginning to welcome private equity’s renewed interest in their sector.
Given the changing market dynamics and the potential for rapid growth in parts of Asia, many now recognise they need a deep-pocketed owner to bankroll their planned international store roll-out programmes. These are now considered essential in the industry, as licensing deals can mean they lose control of how their brands are presented.
In the hope of playing catch-up with their French counterparts, several Italian luxury goods businesses – including Prada – are considering IPOs at the moment. Private equity buyers including Carlyle are lining themselves up for pre-emptive bids – albeit at high premiums.
They seem to be reassured by recent successes such as the tertiary buy out of the London-based shoe and leather goods group
This has passed through various private equity hands in recent years. First it was acquired by a consortium including Phoenix Equity Partners and Robert Bensoussan (a former chief executive of Christian Lacroix) in 2001. The company then changed hands again for £101m in 2004, when it was acquired by Lion Capital, formerly Hicks Muse Tate & Furst’s European arm. Lion expanded the group’s collection of retail outlets from 23 to 60 and in February sold the business, which has sales of £65m, to TowerBrook Capital Partners for £185m.
Now TowerBrook intends to use the shoe group – whose founder is no longer involved with the business – as the platform for a diverse group of luxury goods brands. Any purchases are likely to have a turnover of at least £15m. Robert Bensoussan, who recently stepped down as Choo’s chief executive, is masterminding the process.
Another recent success story is that of
These sorts of successes probably explain why the luxury goods sector is awash with rumours at the moment. Current targets for private equity players are said to include the Florentine leather goods group Ferragamo, if it does not go public. Another is Damiani, the Italian jewellery brand.
John Guy, an analyst at
Guy warns that the recent credit crunch is going to make very large deals in the sector quite rare. However, he does expect to see a number of private equity-funded deals in the €300m to €500m range. “There is a greater willingness among the banks to support smaller deals.”
However, some observers believe private equity’s love affair with the sector may be short-lived.
Antoine Colonna, a luxury analyst with
“Just because we have seen one big deal – Permira’s acquisition of Valentino Fashion Group, which was completed before the credit crunch made itself felt – its doesn’t change my thesis.”
The other problem is that given the continued buoyancy of the consumer market and the number of potential buyers, luxury goods companies are commanding extraordinary premiums nowadays.
Johann Rupert, chairman of the
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