As N Brown chairman Andy Higginson prepares to stand down to pursue private equity opportunities, which are the retailers that pique investor interest?
The retail industry has long been an attractive investment destination for private equity (PE) houses.
Drawn by the extremely fast pace of change, as well as significant disruption in the form of new players, new strategies and new propositions, private equity has played a significant and active role in the growth of the sector over the past few decades.
In particular, the extraordinary pace of change seen across the retail environment in recent years lends itself especially well to PE.
Such investors perhaps could and should be viewed more as transitional owners who will hold onto a business over the short to medium term, during which time they will explore and progress new growth opportunities in order to prepare the company for its next lifecycle.
However, it is important to highlight that the approach being pursued by PE houses in the retail sector today is somewhat more nuanced than perhaps it has been historically.
Prior to 2008, a simple retail roll-out strategy was attractive to private equity for a number of reasons. For instance, the pace of store openings was relatively easy to conduct due diligence upon.
Additionally, retailers had positive working capital profiles and ‘secure’ payback periods on new stores, which PE found very appealing.
“Typically, growth drivers are much more bespoke to the particular sub-sector involved”
And, significantly, there was a large amount of fragmentation in mid-market retail, which generated plenty of attractive targets with which to pursue such a strategy.
These days, however, a simple modus operandi is harder to come by.
Typically, growth drivers are much more bespoke to the particular sub-sector involved – for example, there are pockets in the market that are fast outgrowing others and generating plenty of interest as a result.
Benefits of scale
One such area is the increasing blend of athletics and leisure, while another is health and beauty – both capitalising on increasingly health-conscious consumers spending more on wellbeing products.
“The retail sector competes for these funds with other sectors and needs to better clarify and simplify what successful strategies are”
The current environment also affords real benefits of scale and there is a significant amount of money PE houses have raised which needs to be spent.
However, the retail sector competes for these funds with other sectors and needs to better clarify and simplify what successful strategies are in an omnichannel world.
Therefore, as long as investors can be comfortable with factors such as the extent to which a potential investment benchmarks against standard KPIs for online retail; a consideration of the role of bricks and mortar as part of an omnichannel strategy; and ensuring systems can cope with different growth strategies (including internationalisation), then retail will remain an exciting opportunity for PE for the foreseeable future.
While it could be argued that a retail play now requires greater expertise and patience than ever before, the gains are also potentially much greater.