Brand private equity investments have increased, but not all have been success stories. How can PE and brands work together successfully?
Over the last couple of years, brand private equity (PE) investments have increased strongly. Brand investments were very attractive, PE investors had a positive influence, but not all PE investments have been success stories. From my experience as a CFO in that environment, I’d like to share some learnings on how brands can grow successfully with private equity.
PE Attractiveness of Brands
PE investors invest in all types of industries and favour strong brands. Be it Pandora in Denmark, CBR in Germany, Karl Lagerfeld in France, Desigual in Spain, Moncler in Italy, or Wedgewood in the UK – these, along with many other European brands benefit (or have benefited in the past) from brand private equity.
PE investors love brands, with their simple business model and great potential for growth. From a PE perspective, brands have a capital-light business model. That is, growth in wholesale can be generated with low capital investment and with an excellent working capital structure, so long as the brand has the right products and branding.
If wholseale growth is not an option, there is still a good chance chance to grow the brand with investments in its own retail stores – although this may lead to high capital investments and weakens the working capital structure. If done successcully, however, growing own brand stores is an attractive growth model.
European Brand PE History: Light & Shadow
The last decade saw many brands grow as fast as the highly praised investment in internet companies. Based on such growth and success stories, some brands have even reached a billion-dollar valuation. Even if valuations of $1 billion and above became as rare as unicorns, there are still plenty of brands with moderate growth rates, and even some with strong growth rates of up to 20%.
In Europe, some of the brand success stories are directly linked to the financial influence of the investor – and this also applies to previously ailing brands. Many may not remember, but Gucci was an ailing brand before Investcorp, a brand private equity investor, brought in capital and new management that turned it around and grew it into a leading global luxury brand. Other examples where private equity has pushed the business of brands include Hugo Boss or Jack Wolfskin. Some brands have even benefited from more than one investor over the years.
However, having an investor was not beneficial for all brands, sometimes it even turned out to be a burden. Having experienced PE investments as a CFO twice, I can say that working with brand private equity is inspiring, but can also be a challenge. PE investors usually exit after 3 to 5 years. Management has to consider the strategic long-term perspective of the brand to ensure there is a strategic and financial growth story after the PE’s exit.
Investing in Brands: What to Look For?
PE investors have all their unique due diligence processes and financial advisors who check the potential ups and downs of a brand’s business model. From experience across the brand industry, the following five topics are worth considering in more detail before investing in brands.
Top 5 Brand Investment Checks
|1.||Does the brand have a solid position that works internationally?|
|2.||Is the growth model scalable outside the home market?|
|3.||Is it the right organisation and is it capable of managing the next step?|
|4.||Is the business model ready to grow with own retail in High Street locations?|
|5.||Do recent new full price stores show a strong payback?|
Collaborating with PE: What to Look For?
When considering whether to invite a PE to invest in your company (or to take it over entirely) you should consider the following points before you make your decision, in addition to the monetary benefits.
Top 5 Brand Private Equity Checks
|1.||Does the PE investor have a brand & retail track record, given current or former investments?|
|2.||What references do other managers give about the PE investor?|
|3.||How will the PE investor support your business?|
|4.||Is there a good chemistry between the PE investor and you?|
|5.||How do they deal with problems in the event of a crisis?|
Get the Best of Both Worlds: Balance Growth
PE investors are a strong energiser to every business model. They will contribute as a valuable strategic and financial sounding board, and they will be demanding if growth and profitability come in low – and rightly so. They push for performance and return on capital, where family driven companies may have let it slip a little. However, as is the case for every energiser, be sure to take it only in healthy doses.
There has been much blame on the investors for cases of failed growth. At the end of the day, however, management creates success or failure. After all, management is responsible for driving the brand in the right direction and for using investments where they make most sense. PE brand investors have their influence, but it is up to the management to strike the balance between brand’s needs and investors’ wishes.
About the Author
Andreas Klotz is an experienced CFO with a track record in change management and performance improvement. He has significant experience in working with large, internationally known brands – public sector, privately owned as well as PE backed. If you want to collaborate with Andreas on private equity or share your thoughts, you can reach him via email or connect with him on LinkedIn.
Guido Schild was a banker and controller before he became a consultant in brand growth & retail strategies and worked on 20+ investment due diligence and post-merger integrations. Today he coaches startups. Read more of his work here or connect with him on LinkedIn.