Fashion Companies Sitting in Private Equity Portfolios

Fashion Companies Sitting in Private Equity Portfolios

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Private equity firms might be more cautious — tiptoeing up to deals instead of strutting — but the big money players are still very much in fashion.

While some investors are kind of stuck in the sector, left with bets on brands they haven’t been able to cash out, others are charging to the fore, looking to jump onto the next big thing. Witness investment giant Advent International, which bought a majority stake in Zimmermann last year at a valuation that reportedly topped $1 billion. 

Despite some dealmaking in the background, a private equity backlog has been building up in fashion. Financial investors usually look to buy into a business, help rev it up and then flip the investment.

But whether it’s the pandemic, a tepid market, a lack of buyers or something else, many fashion companies find they’ve had the same private equity backers for much longer than the three to five years that is typical.

In a global study for WWD, Dealogic found at least 46 fashion companies that have had private equity investments for longer than five years — from Reformation at five years to Corneliani at eight years and Tory Burch at 11 years. 

That backlog creates a certain pressure that could help more deals get done. 

“Every year that they hold the company, they’re going to pay the debt cost and it lowers their returns,” said Scott Markman, founder and president of MonogramGroup, which specializes in branding at private equity portfolio companies. “Loosely, they’re trying to double, triple the money they plunk down. When they take the cost to run the company and the cost of debt to take it out, what do they get back?

“The clock is ticking the whole time and it gets into that sort of fifth year and all of a sudden the investors are like, ‘We’ve got to get our money back,’” he said. 

It’s an approach that does not always jive with fashion, which Markman described as a “third rail” for private equity companies without a specific expertise in the industry.

“The world of fashion is fickle,” he said. “What’s the risk profile? What skill set do we have to pursue that in terms of manufacturing and distribution and marketing synergy and all that stuff?”

But for the stylish and the brave, fashion dealmaking just might perk up again if the market continues to stabilize and, fingers crossed, the U.S. presidential election concludes smoothly. 

In addition to the companies sitting in private equity portfolios, some new brands could be coming on the market. 

Tapestry Inc. is already said to be shopping Stuart Weitzman and could be looking to make other deals now that its $8.5 billion buyout of Capri Holdings has been held up on antitrust grounds and is likely off. And Capri could look to sell off Versace and Jimmy Choo, while its Michael Kors brand is seen as a candidate for a private equity-backed buyout and turnaround.

“There’s going to be lots of [mergers and acquisitions] activity in the market in the next 12 to 18 months just based on where companies are,” said consultant Nora Kleinewillinghoefer, a partner in Kearney’s consumer practice who focuses on apparel, lifestyle brands and luxury.

“This year, for the first time, everybody agrees that we’re fully out of COVID[-19] and brands are at a much more steady state,” Kleinewillinghoefer said. “There’s also a bit more predictability. 

“A lot of brands that had that more steady growth that could have been accelerated by [private equity] went through an absolute roller coaster in the last four or five years,” she said. “Now that’s settling.”

Fashion might be about romance, but private equity is much more about math. 

“It’s always an equation,” Kleinewillinghoefer said. “The clear curve of what the expectations are, returns, their models — and when those models can’t be predicted, it’s too risky of an acquisition to make.” 

If the market is getting back to a point where investors can run fashion companies through their models and get results that they’re willing to bet on, it could be that at least smaller deals will start to come together.

Sonia Lapinsky, partner and leader of fashion retail at AlixPartners, said: “If it comes back, it’s going to be with these smaller, much more innovative brands that are really getting major consumer attention quickly and growing like crazy. It’s been a slow simmer for such a long time.” 

Many of the big private equity companies that played in fashion — like Carlyle, which once bought and sold Supreme — have gotten out of the consumer space or put it on the back burner. 

“The performance of retail over the last few years, outside of luxury, is one of the biggest problems, it’s just been so underwhelming,” Lapinsky said. “And even if [private equity owners] can work their magic and make some improvements, they can’t necessarily…get the multiple that they’re looking for” when they go to sell. 

“There have been a lot of cases where they just can’t grow them enough to make an IPO possible, where a few years before that was the playbook,” Lapinsky said. “Now maybe you hand it off to another [private equity firm] but you’re not going to get what you thought.” 

One example is Golden Goose, which in 2020 was acquired by Permira and was just about to go public this summer when the process was pulled given market volatility. 

Now the luxury sneaker maker is again among the private equity-owned fashion companies looking toward the future. 

Here, a look at brands that have taken money from private equity.

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