Why Private Equity Is Still Chasing Fashion

NEW YORK, United States — In mid-December, private equity firm L Catterton announced it would acquire a 51 percent majority stake in Ganni, the Copenhagen-based fashion brand that, in less than a decade, has transformed itself from a reliable, if sleepy, knitwear label to a trend-forward, influencer-powered Instagram sensation, clocking sales of more than $40 million a year.

For L Catterton, the deal capped off a busy year of fashion-related investments in companies such as Korean eyewear line Gentle Monster, men's activewear label Rhone, indie skincare brand Tula, Colombian beachwear brand Maaji and menswear upstart Mizzen+Main, which were brought into a portfolio that already included French high-street player ba&sh, makeup artist-driven cosmetics line Cover FX, high-end shoe label Giuseppe Zanotti, Chinese multi-brand fashion platform Trendy International Group, kid's clothing line Hanna Andersson and fine jewellery brand John Hardy.

It's no surprise that L Catterton leans into the category. Its shareholders include LVMH and Groupe Arnault, the family holding company of LVMH chairman Bernard Arnault. But L Catterton is by no means the only private equity firm currently betting big on fashion.

In October 2017, the market got wind of private equity giant Carlyle's investment in zeitgeist-shaping streetwear brand Supreme. Before that, Carlyle was best known in the fashion industry for its investment in Moncler, which eventually resulted in a close-to $1 billion initial public offering. (The firm's current portfolio also includes Golden Goose sneakers, Nixon watches and Italian brand Twinset.)

New York-based Apax Partners also made waves this year when it effectively acquired MatchesFashion at a valuation said to be even higher than the $1 billion figure that has appeared in market reports, following a fierce bidding war for the luxury e-tailer, which is said to have also attracted interest from Bain Capital, KKR and Permira. In early December, Apax also took a minority stake in MatchesFashion competitor Moda Operandi, participating in a $165 million round co-led by billionaire Adrian Cheng, who made the investment through K11 Investment and C Ventures.

And yet, none of these investments were in a fashion brand in the traditional sense. Perhaps that’s because the relationship between private equity and fashion has long been skittish, thanks to the category’s unpredictable nature: fashion brands often exhibit a jagged growth trajectory, with sharp peaks when trends hit and steep drop-offs when they don’t. Recent changes in the way the fashion business works have accentuated the disconnect. Today, private equity firms are, for the most part, steering clear of traditional fashion labels, many of which are finding it difficult to grow as the bottom drops out of the wholesale model.

Consider Permira, which once owned stakes in high-end fashion houses Valentino, Hugo Boss and Proenza Schouler, all of which it exited successfully. The firm's current portfolio includes zero ready-to-wear brands. Dr. Martens, the British maker of rubber-soled boots, is its only fashion investment.

"Investment in major fashion houses has softened up. It has heated up for brands that have established themselves in multiple product categories and have an established distribution strategy, meaning direct-to-consumer, wholesale and some level of e-commerce," says Ron Frasch, an operating partner at Castanea Partners, which currently owns a stake in Proenza Schouler as well as beauty brands Tatcha and Urban Decay. "It's much more difficult for brands that do not have a direct-to-consumer presence. It's hard if you're one-dimensional."

Not all legacy brands are off the radar of private equity firms. Particularly those that have the potential to build up a strong direct business in the US and a larger presence in China, where consumer appetite for new brands continues to grow. DvF, which aims to sell a stake of its business, is a good example of a mid-market brand that will continue to attract interest despite its reliance on wholesale.

Overall, it’s just harder and more expensive to build a brand today than it was 15 years ago, which means many brands are seeking investment earlier on in their growth cycles, either from a private investor or venture capital. For private equity, these early stage deals are simply too small to entertain. “If you’re looking to take a stake in a brand that does $10 million a year, initiating and consummating the transaction is incredibly costly and even if you quadruple revenues, you’re still only at $40 million,” says Douglas Hand, a corporate and transactional lawyer specialising in fashion. “The default for private equity firms is one more zero.”

Some new-model businesses — like Supreme, or costume jewellery brand Kendra Scott, which is minority-owned by Berkshire Partners — have managed to reach a level of sales attractive to private equity. (Both have billion-dollar valuations.) “Very specific types of brands — Moncler, Canada Goose, Mackage — those have real brand equity,” says Gail Zauder, managing partner at Elixir Advisors, a New York-based investment banking and financial services firm. “They’re unique, they’ve created these very hot and very desirable brands right out of the box. They’re not very fashion driven, and there were opportunities to really grow them.”

For fashion brands generating enough revenue to be a candidate for a private equity investment, there are benefits and drawbacks to such partnerships. While private equity funds are often able to provide the brand with a hefty amount of capital — sometimes with the idea that the more money injected, the faster the resulting growth — they aren’t always able to fully support on the operations side.

For a well-established brand that wishes to operate independently, this can be a boon. For instance, when Isabel Marant sought an outside investment, it chose Paris-based private equity firm Montefiore, which took a 51 percent stake in the business. "We were reaching a size of business where we needed to have some partners to help us drive," Marant told BoF in July 2017. "Now I can be 100 percent focused on creativity, developing my idea of the woman and the silhouette." Australian brand Zimmerman, which sold a minority stake to private equity firm General Atlantic in 2016, was looking for a financial partner, not an operational one.

Other brands desire — and require — hands-on support, which can be offered by luxury groups like LVMH, Kering, Mayhoola and Tapestry with expertise in the fashion category. While groups don't always pour as much money into their investments early on, operational support and synergies with other businesses in a given portfolio can help a brand save money and scale.

Private equity firms often hire operational veterans in order to supplant such a system. For instance, Frasch — whose past experience includes stints as president of Saks Fifth Avenue and chief executive of Bergdorf Goodman — served as Proenza Schouler’s interim chief executive when Castanea acquired a minority stake in the New York-based label in 2015. Former Urban Outfitters executive Glen Senk is an advisor to Berkshire Partners while operating his own firm, Front Row Partners.

However, while groups tend to consider brand acquisitions long-term investments — often with no exit in sight — private equity firms are seeking a short to mid-term return on their financing. (Typically 3-5 or 7-10 years, depending on the firm.) Why then, does private equity regularly place bets on fashion, an industry known for volatile businesses that can take decades to build? The potential for a perfectly timed exit is low, especially in this uncertain era.

“All of my life I have never seen the swiftness of change in the last 24 months,” Frasch notes, citing “unstable distribution” as an ongoing challenge. “It’s almost like a tsunami hit our industry.”

It may be because the bets can pay off big. Consider Moncler, which was backed by private equity firms Carlyle and Eurazeo. Before the Italian outerwear house went public in 2013, institutional investors wrote €20 billion worth of pre-market orders, 31 times more than the number of shares reserved. (In the end, the brand raised nearly $1 billion.) Or Valentino, which Permira sold to Qatari investment group Mayhoola in 2012 for $856 million. That deal allowed Permira to pay down the debt on one of its other fashion brands, Hugo Boss, which it subsequently unleashed in 2015 — making 2.3 times its investment. Bain Capital earned a major payout when it took Canada Goose public in March 2017.

For private equity brands that are bullish on the fashion space, there may also be an understanding that exits may take a bit longer when compared to other categories. “It depends on their strategy, but when a private equity firm invests in fashion, I think they know it’s going to take a little more time,” Frasch says. “It also depends on return expectations for their entire portfolio.”

So while the appetite to invest in traditional brands may continue to wane, labels that appear to have unlocked some sort of insight into what the modern consumer wants will remain interesting to private equity. As Zauder says, “You can’t assume that there’s a long-term solution to anything anymore.”

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