Investments in Italian fashion houses are back in vogue among international private equity firms. In fact, following, on the one hand, a 15-year steady growth of the global luxury goods market and, on the other hand, the positive externalities brought about by the recent devaluation of the Euro to Italian and other Western fashion entities, private equity funds of any size, particularly from North America and continental Europe, have started re-directing their investment focus towards the fashion business, after years of little or no interest whatsoever.
Determining factors of the investment shift
The recent devaluation of the Euro has strongly boosted the revenues of Italian fashion firms through currency tailwinds, since the supply chain of such companies comprises the production process in Europe and the sale of goods abroad. Top foreign markets for Italian fashion businesses include North America and Asia-Pacific, where sales of the year so far for top Italian fashion houses of the likes of Salvatore Ferragamo and Brunello Cucinelli were up 16% and 34% respectively (compared to 2014 values).
The PE investment move towards fashion originated also from a trend which sees Western private equity establishments increasingly investing in small and medium enterprises (SMEs) other than in large groups. Because they are finding themselves with higher and higher sums of unspent cash (see bar chart below)
In order to avoid paying high prices for a shrinking group of large investments with uncertain returns, private equity entities have radically changed the way they make profits, by adapting themselves to the purchase of smaller assets, that are often expanded through an acquisition spree afterwards.
In this regard, Italian fashion houses, which have generally always remained small in size with the main aim to preserve the ‘exclusivity’ of their products, are proving to be an ideal fit for PE companies, in terms of both investment size and type as well as return potential.
This point has been demonstrated by four major buyouts completed over the past two years. Firstly, the Italian PE fund Clessidra has invested in jeweller Buccellati and acquired a 90% stake in Roberto Cavalli for nearly €1bn. Clessidra bought a majority stake in Cavalli (which had had talks with Permira, Investcorp and VTB Capital regarding the potential acquisiton as well) and together with minority co-investors private equity firm L-GAM and Chow Tai Fook Enterprises Ltd (a Hong-Kong based holding company) it will own 90%. Roberto Cavalli, the 74 year-old founder of the brand, will keep a 10% stake.
Clerridra’s operation has followed the purchase of a 20% stake in Versace by the giant The Blackstone Group last year for approximatively the same sum, along with Qatari fund Mayhoola’s buyout of Valentino and, lastly, The Carlyle Group’s stake increase from 70% to 90% in accessible-luxury Italian manufacturer Twin-Set and stock market listing of Moncler, which allowed the American alternative investments firm to reap a sum equal to six times its initial investment.
Such interesting operations reflect a change from the recent past when, as mentioned, private equity and luxury groups had shown themselves in several instances to be ‘uncomfortable bedfellows’.
A booming global luxury market
Despite the relatively difficult relationship between luxury manufacturers and PE investors, one more extremely important ‘change call’ has emerged – the global luxury goods market has nearly doubled over the 2000-2009 period, with increase in aggregate value from €128bn to roughly €230bn and in consumer numbers from 140m to 350m+ (with Chinese making up a third of total worldwide spending).
Such growth has been driven by international tourism and a growing middle class. Globally, the luxury car market, for example, is up 10% from 2013; luxury hotels have seen demand rising by 9%; and fine wine is growing slowly but steadily. Further spurred by a continuous two-year growth of the fashion sector in Italy, private equity firms’ executives have seriously started ‘changing their minds’, also because consumers of luxury items worldwide are gradually switching their preferences from large established brands such as Gucci and Louis Vuitton to independent, small-scale fashion houses, that, additionally, offer, to investors, the advantage of being fast expanded internationally and of being floated on the stock market through a 20-25% stake only, unlike big groups. As argued by Armando Branchini, founder of consultancy InterCorporate and vice-chairman of luxury lobby Altagamma (both based in Italy),
“The financial market is now aware of the opportunity of being able to invest also in mid-sized luxury companies”.
A cautious investment approach
Notwithstanding the new positivism surrounding the ‘fashion-PE’ link, managers of upscale clothing firms are still complaining about PE firms’ short attention span. This position is shared by Marco De Benedetti, of Carlyle Europe Partners, who says that luxury is still “a peculiar sector for PE” because the “soft” and “creative” nature “is not their core competence“.
What works is private equity’s firepower to take a niche European brand global, say other fashion and private equity executives. Still, there are three major factors to stress that alternative asset managers might well have to take into account if they are to succeed with such particular industry:
- Respect for founders – Permira, for instance, did not eventually accomplish a successful investment in Valentino because its executives did not thoroughly communicate with Mr. Valentino himself and Mr. Giammetti, both of whom are the actual founders of the renowned Milan-based fashion house;
- Committment of significant sums of money – Valentino, for example, was able to implement its ambitious global retail plan because of Mayhoola’s deep pockets. The Qatari investment firm committed, in fact, as much as €200 million over two years, increasing the Italian brand’s revenues to nearly €700m with EBITDA of €64m from revenues of €230m and EBITDA loss of €9m.;
- Patience – Getting a profitable return on fashion investments can takes years, if not decades.
The time is worth the money
The short-term investment focus of most private equity firms might likely be deemed the major divergence from the time- and capital-intensive fashion industry. Nevertheless, those who have the patience to devise and execute on a long-term strategy will be much more likely to reap the rewards, that, in many cases, might be far higher than those achievable with many other sectors. Increasing the number of female counterparts on boards, likely better able than men at spotting profitable investments in the consumer and retail sector, and fostering acquisitions of European assets by Chinese investors, might also help in this respect.
With increased focus of private equity firms on small and medium enterprises, boosted demand for Italian fashion and luxury goods worldwide a relatively favourable macroeconomic environment, and, also, enhanced openness to external investors by owners of Italian fashion houses (most of which are single-run and family-owned) because of the still sluggish Italian economy, an investment in what it perhaps Italy’s best-known economic field might be the way to go for successful international alternative asset managers.