Last week’s news that Comet has gone into administration adds further weight to those who argue that private equity does more harm than good to the retail sector.

Putting financial engineering to one side for a moment, last week’s news that Comet has gone into administration adds further weight to those who argue that private equity does more harm than good to the retail sector. For the doubters, I challenge you to come up with some good examples where firms have successfully risen to this challenge.

There are some. Pets at Home is a private equity success story, having first been acquired by Bridgepoint in 2004 and then six years later by KKR. The company has reported a 7% sales increase (up 1.3% in like-for-like sales) for the 52 weeks ending March 31, 2012, bringing its turnover to an impressive £544.3m.

However, for every Pets at Home success story, there are plenty of examples where private equity firms have failed when it comes to running a retail business - and it’s easy to see why. To quote a popular adage, retail is detail.

Most private equity firms that choose to invest in this sector are simply not set up to deal with the details of retail. Why? Because unless they are on the shop floor every minute of every day, it is impossible for these companies to understand the intricate operational details that are vital to running an agile and dynamic business in this sector.

Private equity firms also struggle more than most to see into the crystal ball that all retailers need when it comes to predicting fashion and consumer trends correctly. Without a detailed understanding of how customers think, behave and buy, it will be impossible for these firms to have the detailed knowledge that they need to drive sustainable success in this sector.

We know it’s not the private equity firms themselves that run the business, but therein lies the biggest problem. Many firms will invest in strong management teams when making an acquisition, but that doesn’t make up for the fact that ‘buying into retail’ means ‘buying out the founder’ in many cases - and/or getting rid of other executives with decades of experience and knowledge.

Because of this shift, the business being acquired will often lose the ‘je ne sais quoi’ that made it so attractive to investors in the first place. And even in cases where the original management team stays on, its members are not nearly as incentivised to make the business a success as previously, as they will typically have received a pay-out as part of the initial deal.

Faith Shoes is a good example of this. Jonathan Faith did a fantastic job of running the business after his father retired, and helped the company earn a reputation as one of Britain’s finest shoe retailers.

As a result, Faith Shoes was bought for £65m by Bridgepoint Capital in 2004, but the combination of losing the Midas touch of Jonathan and a huge debt pile meant the company just couldn’t keep the momentum going, and it was bought by John Kinnaird via a pre-pack administration just four years later.

By 2010 all of its stores were closed as part of a new administration, leading to the loss of more than 1700 jobs. Sadly, the list of private equity retail failures will go on and on - with Comet just the latest in a string of retailers to fall to their knees after a high profile private equity acquisition.

  • Dan Coen, director, Zolfo Cooper