Private Equity and Luxury Goods


Private equity is driving M&A growth
The private equity sector is by all accounts the single largest buyer and seller of businesses in the market as a whole today. Some observers credit private equity firms with a good half of the entire M&A market, with almost no limit on deal size due to the ever increasing amounts of capital available to the leading funds. The buyout boom has been fuelled by a number of factors: private equity groups have been able to raise huge capital for acquisitions, thanks to increased demand from pension funds for exposure to alternative assets, while attractive bank lending terms have helped equity groups spend aggressively.

Interest for the luxury goods sector
This has led some commentators to herald the advent of private equity investors to the luxury goods sector. Indeed, these last few years the fashion and luxury goods sector has seen some activity from private equity funds. In the last twelve months Change Capital Partners acquired Jil Sander, Sun Capital Partners took on Stila Cosmetics, and Sciens Capital Management and Plainfield Asset Management together bought Asprey. 2005 saw the $5 billion acquisition of Neiman Marcus by Texas Pacific Group, and Tommy Hilfiger being taken private by Apax Partners in a $1.6 billion buyout. Earlier deals included the purchase of a stake in Escada by HMD Partners (2003), the acquisition of Calvin Klein jointly by Apax Partners and PVH and the buy-out of Ferretti by Permira (both in 2002), and the acquisition of Bally by Texas Pacific Group in 1999. However the two deals that really fire people’s imagination are the acquisition in 2004 of Jimmy Choo by HM Capital Partners from Phoenix Equity Partners, another private equity firm, and the grandfather of all private equity deals in the sector: the (now ancient) acquisition of Gucci by Investcorp.

Part of the reason for more active interest from private equity firms lies in their perception that the luxury goods sector has become more “rational”: acquisition multiples have come down from the crazy days of 1999-2000, and the management pool available to be put to work at target companies is deeper, as illustrated by the recruitment of former executives from the detergent industry to senior positions at luxury goods companies. Private equity funds are also attracted by the growth potential in new markets, such as China, Russia, and the Middle East, and by the widespread emergence of affordable luxury. Finally, recent success stories such as Jimmy Choo have demonstrated that private equity ownership can yield high returns.

Pinch of salt
Despite recent activity, purported interest from major private equity participants and the strong growth in the luxury goods sector, we do not believe that private equity funds have been as active as they have been in other sectors.

We think that the term “luxury goods”, as it relates to recent private equity activity is sometimes a bit of a misnomer, and covers a variety of different situations, ranging from turnarounds (Asprey, Bally, Stila) to almost pure retail (Neiman Marcus). We are of the opinion that luxury goods companies remain uneasy targets for the typical private equity fund: while a healthy luxury goods business will have very enjoyable margins, acquisition multiples tend to be higher than in most sectors, the development of own retail for luxury goods companies is very cash-consuming, and true successes are rarely built within the typical investment holding requirement of 3 to 5 years. Add to that the fact that a significant part of a luxury goods company’s success takes its roots in the design and creativity sphere, and you find a series of elements that do not necessarily lend themselves well to rational private equity investment. Let us see what happens in 2007!