By Kevin Kaden, partner with BDO USA’s Private Equity and Transaction Advisory Services practices and Ted Vaughan, partner and leader with BDO USA’s Consumer Business practice
Our recent Sixth Annual PErspective Private Equity study found that when it comes to new investment opportunities, the private equity community may continue to temper their expectations for consumer business deal flow this year.
Following a weak 2014 for PE deal volume in the retail and consumer business space, our study found that only four percent of fund managers expect the retail and distribution sectors to offer the greatest opportunity for new investments in 2015. This prediction is even more modest than fund managers’ expectations last year, when eight percent identified the retail and distribution sectors as the greatest opportunity for new investment. ” Additionally, when asked which three sectors are most likely to experience decreasing valuations in 2015, fund managers most frequently cited the retail and distribution sectors (57 percent).
Still, recent market activity may contradict these gloomy predictions. In January, PE firm Sycamore Partners sold Stuart Weitzman, a luxury shoe brand, for $574 million. The Street reported that the initial return for the firm would be nearly 1.88 times its initial investment – or $310 million. Additionally, last month Blackstone unveiled its first fund targeting retail investors. At the time of its announcement, the fund had already raised $500 million.
This activity aligns with insights from our colleague, Al Ferrara, head of BDO USA’s Consumer Business practice. Back in December, in a conversation with Private Equity Analyst, Al observed that while the apparel industry had been struggling, “there’s probably going to be some shake out and there will be opportunities.” Specifically, Al identified distressed teen retailers as investment opportunities, either as leveraged buyouts or consolidation mergers. With fund managers expecting new deals and add-on acquisitions to be larger this year than they were in 2014, this is certainly a space for the industry to keep its eye on.
For manufacturers in the consumer business sector, the outlook is far brighter. For the third year in a row, the largest percentage of fund managers cite manufacturing as providing the greatest opportunity for investment in 2015. Similarly, manufacturing ranked among the top three industries expected to experience increased valuations in 2015, along with technology and healthcare/biotech. Demand for US manufacturing was high in 2014, and developments in innovation, reduced energy costs, and the overall US economy will likely keep demand high in 2015.