The Deal Market Is Reawakening
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The dealmakers are starting to come back.
Like everyone else, most of the investors who buy and sell companies went home in March and in the words of one major dealmaker, went into “life-raft mode,” shoring up the businesses already in their portfolios and helping them plot a course forward.
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But once that work was done, they started to venture back out into the market, if only via Zoom, to reconnect with potential partners, to commiserate about the pandemic and business with both sides reassessing what makes sense.
There has been some pandemic dealmaking during the last few months, most notably KKR’s deal to buy 60 percent of Wella from Coty Inc. at a valuation of $4.3 billion, and, elsewhere in the consumer space, L Catterton’s purchase of $400 million in exchangeable senior notes tied to Norwegian Cruise Line Holdings.
So far, most of the action in fashion has seen jockeying by brand specialists like Authentic Brands Group for bankrupt names, including Brooks Brothers and Lucky Brand. There are also strategic players like PVH Corp. and VF Corp. looking to consolidate their holds on various sectors in the industry, while numerous players circle around bankrupt retailers Neiman Marcus Group and J.C. Penney Co. Inc.
But that’s just the tip of the iceberg, which includes a lot of private equity and venture types looking to wheel and deal.
Many buyers have money and access to more, while business owners are resetting value expectations at a time when an economic recovery looks to come at a snail’s pace at best — and not until late next year or 2022 at worst.
It’s a situation ripe with potential and yet still tentative. Some possible transactions could fall away if the coronavirus situation improves and companies start feeling better going it alone. Likewise, some deals could get sidelined if the pandemic continues to worsen.
Either way, the market is reawakening and buyers are out and on the hunt with new takes on a new world.
“We’ve reflected on COVID-19 and what consumer behavior will be post-COVID-19 and based on that we’ve refined our thinking,” said Jill Granoff, chief executive officer of Eurazeo Brands, which has stakes in Pat McGrath Labs, Bandier, Herschel and more. “We are very focused now on consumer staples versus consumer discretionary.”
That includes a special focus on categories such as skin care, hair care, food and beverage, health and wellness and pet care. “Those are areas that we think will be strong regardless of the situation,” Granoff said.
But even companies that were well-positioned when COVID-19 hit are needing help.
“We are getting a lot of phone calls for what I will call rescue capital — strong brands that find themselves in a bit of a liquidity crunch because of the store closures and they are looking for partners that can come in and help shore up their balance sheet,” said Granoff, who is also hearing from “companies that may not need money, but want an operating partner to help them through this crisis. Someone that can help them define the strategy and think through priorities. Many people just don’t want to go it alone anymore.”
And even in the midst of crisis, there are as many different investment angles as there are investors.
One approach is to look at what retailers and brands need to spend on today and invest upstream.
Levi Strauss & Co., for instance, laid off 15 percent of its corporate workforce, or 700 people, to cut costs and ensure that it could continue to invest, both in its own store network, but also its burgeoning e-commerce business.
That type of move is an opportunity for companies that play, for instance, in artificial intelligence or data analytics.
“Companies need to invest in technology to continue to improve the customer’s experience,” said William Detwiler, general partner at Fernbrook Capital Management.
Detwiler pointed to Lilly.ai, a Fernbrook investment, as a company that fits neatly into the future. Lilly.ai uses data on consumer shopping patterns to serve up recommendations and helps reduce returns.
“Instead of just being a consumer fund that’s focused on brands, we have the background to focus on both brands and technology companies,” he said.
Still, the mergers and acquisitions dance in fashion often requires a delicate balance.
Entrepreneurs with growing businesses and plenty of buzz tend to see big checks with lots of zeros when they envision selling their companies. Meanwhile, the practiced hands in the private equality space have seen lots of hot names come and go and are very careful when spending on businesses that aren’t backed up by profits or proven by scale.
COVID-19 seems to have brought at least some price expectations down.
“We think there’s a better opportunity today to invest more quickly to help companies that lack liquidity, but were very profitable pre-COVID-19,” said Rick Perkal, managing partner and ceo of Firelight Capital Partners, which invested in Hobo Bags in November. Companies with e-commerce sites have done well, while brands dependent on wholesale are looking to transition away from department stores, he said.
“Our deal flow is on fire,” Perkal said, noting Firelight is on the hunt in outerwear, footwear, fashion, accessories, beauty and more.
“Valuations are tricky because you can’t really value them off of 2020 projected earnings … you have to think about the future and what the company could be,” Perkal said.
Typically, companies are bought at a multiple of earnings before interest, taxes, depreciation and amortization — a measure of how much money is flowing through a business. That’s harder today, when businesses have been shut down, are off dramatically this year and when next year is still anybody’s guess.
Investors looking at deals seem to be each coming up with their own answers to the valuation question, often using a mix of past performance, brand heat, an evaluation of management and gut instinct.
In many cases, buyers and sellers might still be far apart in terms of valuation, but they’re inching closer.
“There is a big spread,” said one private equity bigwig. “No one knows how to think about the duration of COVID-19 and the lingering impact. [But] the spread, in general, is shrinking and many companies have greater needs. In many cases we’ve got a receptive ear at management that may or may not have been there six months ago.”
As the established players survey the landscape, there are also some relatively new ones across the spectrum that are coming to the market with fresh eyes.
Brookfield Asset Management Inc., which is a big player in the retail real estate market, launched its $5 billion Retail Revitalization Program in May “to bring much needed capital and assist with the recapitalization of retail businesses.” The program is targeting retailers with normalized revenues of $250 million or more that have been operation for at least two years with “non-control” investments.
In the venture space, Jesse Cole, founding partner at Seed Lab, said having a relatively recent start is an advantage.
“We’re a 2020-legacy venture fund,” he said. “We don’t have all those prior profile companies whose valuations have gotten clocked.
“People are now asking questions they haven’t asked for a while, about risk tolerance and risk sharing,” Cole said. “I think people are becoming a bit more conservative. For us, it’s always about finding the best founder.”
And it’s maybe never been a better time to be a founder and looking to staff up.
“Access to talent is a lot more robust than it’s ever been,” Cole said. “A lot of companies have gone under, furloughed people, laid people off. There’s going to be a lot of really good talent for these earlier-stage businesses. And if there is additional fallout, there are people who have really significant experience from these bigger companies, they’re going to be out there starting new businesses.”
There are also companies with a strong digital base that have managed to keep growing through the pandemic and now might be open to talking to investors, but are thinking of even richer valuations given how much their strength stands out.
One executive at a big private equity firm said companies with brands that have been performing well recently “have been happy to pop their heads back up and say we’re even stronger than we were before,” seeking to underscore just how attractive they are as investments.
That continues a theme that has been shaping fashion in recent years, with struggling companies becoming weaker and the stronger firms growing stronger. Investors who were already wary of mall-based retailers that rely on foot traffic for revenues have now moved on completely and are focused all the more on brands that have direct relationships with consumers.
“We’re not going to try to look like heroes,” said the private equity investor, who is focused on growth companies. “We’re going to stick to our playbooks. Everyone’s talking about setting the groundwork.”
That groundwork could help shape the future of fashion since it will determine just which companies find themselves with deep-pocketed backers in the midst of all the COVID-19 chaos and beyond.
8 Investors Looking for Consumer Deals
The deal market is starting to wake back up after the initial COVID-19 shutdown. So far, buyers and sellers are still mostly just reconnecting and seeing what’s possible today. But there are investors of all shapes and sizes out in the market and more companies than ever needing some extra capital and a helping hand. It’s only a matter of time before the two sides start to wheel and deal in earnest.
Company:
Bain Capital
Key Executives:
Ryan Cotton, managing director
Kim McCaslin, managing director
Portfolio:
Blue Nile
Canada Goose
Varsity Brands
Virgin Voyages
Investment Thesis Today:
Building and growing high-quality companies.
Check Size:
$200 million to $2 billion
Company:
The Carlyle Group
Key Executives:
Jay Sammons, managing director, global head of consumer, media and retail
Marco De Benedetti, managing director, co-head of Carlyle’s European buyout group
Portfolio:
Supreme
Golden Goose (former)
Moncler (former)
Investment Thesis Today:
Founder-led growth companies, a focus on technology and digital capabilities
Check Size:
$75 million to billions
Company:
Eurazeo Brands
Key Executives:
Jill Granoff, ceo
Adrianne Shapira, managing director, North America
Laurent Droin, managing director, Europe
Portfolio:
NEST New York
Pat McGrath Labs
Bandier
Herschel
Q Mixers
Investment Thesis Today:
Investing in differentiated, high-growth consumer brands globally.
Check Size:
$20 million to $100 million-plus
Company:
Fernbrook Capital Management
Key Executives:
Marigay McKee, general partner
William Detwiler, general partner
Portfolio:
La Ligne
Needle & Thread
Swivel Beauty
Violet Grey
Westman Atelier
Investment Thesis Today:
Investing at the intersection of consumer brands and technology.
Check Size:
$1 million to $3 million
Company:
Firelight Capital Partners
Key Executives:
Rick Perkal, managing partner and ceo
Pat Collins, managing partner
Portfolio:
Hobo
Three Dog Bakery
Investment Thesis Today:
Looking for strong brands in fashion, apparel, accessories and footwear.
Check Size:
$10 million to $30 million-plus
Company:
General Atlantic
Key Executives:
Andrew Crawford, managing director, global head of consumer
Andrew Ferrer, managing director
Melis Kahya Akar, principal, head of consumer for EMEA
Portfolio:
Authentic Brands Group
European Wax Center
Grupo Axo
Morphe
Sezane
Tory Burch
Zimmermann
Investment Thesis Today:
Focusing on digitally led brands with accessible price points and, through Authentic Brands, distressed brands able to support licensing revenue.
Check Size:
$40 million to $600 million
Company:
L Catterton
Key Executives:
Scott Dahnke, global co-ceo
Michael Chu, global co-ceo
Portfolio:
Gentle Monster
The Honest Company
Intercos Group
Marubi
Rhone
Sweaty Betty
Tula
Investment Thesis Today:
Research and follow key consumer and technology trends to make investments that leverage deep operating expertise and international network.
Check Size:
$10 million to $1 billion-plus
Company:
Sandbridge Capital
Key Executives:
Joseph Lamastra, founding managing partner
Ken Suslow, founding managing partner
Portfolio:
Ilia
Peach & Lily
The RealReal
Rossignol
Youth to the People
Investment Thesis Today:
Strategic partner for global brands in luxury, clean beauty, health and wellness and disruptive consumer-based technology.
Check Size:
$15 million to $75 million
Company:
The Seed Lab
Key Executives:
Jesse Cole, founding partner
Stephen Ippolito, founding partner
George Hornig, founding partner, chairman
Portfolio:
Something Navy
Stojo
Terra Kaffe
Vantage Point
Investment Thesis Today:
Looking for the best founder.
Check Size:
$350,000 to $1.5 million
