While many feel that the recent credit market turmoil has temporarily closed the book on private equity buy-outs in US retail, we’ll soon write a new chapter, characterised by more realistic valuations and an emphasis on long-term, value-added investing in strong retail brands.
Seasoned private equity investors see US retail as a dynamic sector offering attractive long-term opportunities. Many of those will become even more attractive to financial buyers, as softness in the economy leads to declining sales and lowered financial expectations. Private equity firms will be able to buy at more reasonable levels of leverage.
The days of 35 per cent premiums to market are a thing of the past. David Kim of Apax Partners recently predicted that leverage would begin to be “more normalised”, due to falling market values of public companies. Ultimately, this will be positive, causing financial buyers to take a more disciplined, cautious approach.
Buyers still face the problem that debt required for large-scale leveraged buy-outs is expensive and difficult to secure – for the time being. For deals of US$1 billion (£490.2 million) or more, the window is essentially closed in the interim.
But middle-market leveraged credit availability remains excellent, pricing is stabilising and leverage metrics are settling into a more conservative zone. So we can expect to see a trend toward middle-market deals.
Another trend we expect is a move by international strategic and financial buyers to buy US retailers. With the dollar at record lows, foreign entities wishing to acquire or invest in US companies can enjoy a substantial exchange rate advantage when making investments on the equity side.
As long as our currency remains discounted and potential acquisitions become more reasonably priced, we would expect international investors to emerge as a meaningful force.
As private equity buyers become more selective, we also foresee a sharpened focus on the inherent value of acquisitions, favouring companies that have brands with enduring consumer appeal.
We see no shortage of promising brands being nurtured by savvy entrepreneurs. Examples include Vineyard Vines (men’s and women’s apparel), Forever 21 (teen chic apparel), Revive (anti-ageing cosmetics) and Hearts on Fire (designer jewellery).
The entrepreneurs leading these concepts are finding creative ways to engage consumers and build loyalty. Many are doing so inexpensively and some with little outside capital. As they grow and the founders need capital and/or liquidity, they will become more appealing to private equity.
Private equity has a track record of creating value through the application of capital and managerial resources. Until recently, the market tolerated aggressive assumptions by financial buyers. Now, the balance is shifting back towards paying realistic multiples for innovative, authentic, customer-focused retail brands with an entrepreneurial heritage.
The combination of more rational valuations and the emergence of a new generation of strong brands suggests the US retail private equity market will not stay dormant for long.
Gilbert W Harrison, chairman and chief executive, Financo
No comments yet