Is private equity beneficial for retailers?

A flurry of successful private equity deals in the UK retail sector leading up to 2007 was quickly followed by a number of well-known high-street failures during the subsequent downturn.

In the past couple of years, retail does seem to have come back into vogue though, so what makes the sector attractive to investors?

“There are three broad categories of private equity deals in the sector, and the requirements are very different for each,” comments Mike Hinchliffe, a private equity partner at Addleshaw Goddard.

“There have been larger buyouts of significant retailers with a strong proposition; growth capital deals to assist store roll-out or international expansion; and deals targeting operational improvement, combined with financial support, for businesses that are in distress.”

For and against

There can be many advantages to private equity investment over other sources of capital. Significant capital can be obtained for expansion relatively quickly and governance is more relaxed and entrepreneurial, which often suits the creative approach required in successful retail.

”Not enough attention is paid in the mainstream media to the number of jobs that private equity has created, it is all paid on those that are lost”

Mike Hinchliffe, Addleshaw Goddard

Critics of the model cite the excessive debt levels used on larger deals increasing the risk of business failure, alongside allegations of inappropriate cash- or asset-stripping.

“However, the reality is that failure is more usually underpinned by a tiring business model, and these headlines detract from the significant role private equity has played in developing and growing a number of successful retailers,” argues Hinchliffe.

“Investors are attracted to strong investment opportunities – whether that is niche players, scalability, a truly omnichannel offering or a fresh perspective on a tired brand. Not enough attention is paid in the mainstream media to the number of jobs that private equity has created, it is all paid on those that are lost.”