Following the onslaught of retail IPOs throughout 2014, what are some investment trends and deals that could develop in the year ahead?
Looking back, 2014 could be characterised as the year of the retail IPO. Multiple UK retailers either made their debut or returned to the London Stock Exchange. Capital was freely available from cash-rich institutional investors and consequently valuations achieved tended to be very attractive for selling shareholders.
Private equity, historically a long-standing investor in UK retail, was priced out of the market by public market valuations and few sizeable private investments were completed.
Looking forward, what trends might we see in the year ahead?
Overall, retail is likely to remain a sector of interest while investor requirements (public or private) are unlikely to change too dramatically.
Private equity investors are likely to remain focused on strong UK-based businesses that offer consumers a differentiated proposition. Key considerations would be control over own brand and distribution, clear (and ideally proven) online strategy, distinctive and profitable retail footprint and potential scope for international roll-out (supported by either existing online demand, an existing retail presence or wholesale agreements).
Public market investors are likely to remain focused on similar growth dynamics along with the cash-generative nature of the business and its ability to fund dividends. Retail assets that are over-geared and/or perceived to be under-invested are unlikely to be attractive.
Private equity requires debt to fund acquisitions. In recent years the debt markets have been strong for retail credits. Subject to sector and as long as there are no major global shocks, we expect credit should remain open to fund either refinancings or new private equity-led buyouts. A key focus for any lender will be a retailer’s rent roll and ultimately free cash generation.
For any investor, the management is critical. A strong management team at a weak asset has a considerably higher chance of getting investor support than a weak team at a strong asset. Investors back people, not companies in isolation.
The key question is whether public market demand for retail stocks will remain as strong as in 2014, or whether private equity, supported by the debt markets, will be the strongest buying group in 2015. Our sense is that private equity-led retail transactions will increase this year and that demand in the public market will be softer.
Based on our recent conversations with private equity investors, many funds are looking at retail opportunities for 2015. For many, the key issue is identifying the right opportunities.
The general election may also be a consideration for transaction volumes in the first half of 2015. As May approaches, any investors (public or private) may just wait for the actual result ahead of committing capital. That does not mean investors will stop assessing opportunities in the first few months of the year. It will mean though that deals may close later in the year.
We expect an active market in the retail sector in 2015, with maybe a resurgence of private equity-led transactions.
- Mervyn Metcalf, managing director, Dean Street Advisers