Suckers for bling

By Paul Mackintosh - 15/10/13
Reports from the US indicate that the Blackstone Group is looking to make inroads into the rarefied world of high fashion with a putative bid for a 15-20% stake in Versace that the Italian family-controlled fashion house is putting up for sale in order to fund expansion. This is hardly the first time that private equity has dipped its toe in the sparkling waters of the luxury brand sector. Permira held a controlling stake in Valentino from 2007 before selling it to a Qatari royal family investment vehicle in 2012. Headland Capital in Hong Kong is reportedly looking at luxury car dealerships in mainland China, following General Atlantic’s earlier investment in Zhongsheng Group. And LVMH Moët Hennessy Louis Vuitton SA-backed L Capital has brought the approach full circle through its highly successful funds that bring corporate private equity to the luxury brand business, garnering enthusiastic coverage and keen investor interest in the process. 
Fashion and luxury brands in fact have some characteristics that lend themselves to direct investment. Their products, like drug development, build on an intellectual capital legacy often accumulated over decades. Gestation tends to be protracted, with quite a few misfires. But the eventual payoff can be huge. And the brands often need new investment and experience in scaling businesses internationally to help them transcend their local market origins. That was the thesis for Permira’s original investment in Valentino, which is typical of the kind of enterprise that needed some outside support to grow beyond its family-controlled European roots. At least this means that the private equity groups have something more than just money to bring to the table: after all, the creative DNA is all supposed to reside in the brands themselves. 
Obviously, this is a model that fits well with the long-term investment horizons of private equity, as well as the speculative and ideas-driven value proposition of venture capital. But sacking the CEO and finding another could be far harder in a house like Versace than in a Silicon Valley start-up or a mature industrial group. These firms bear the names of individuals for a reason. And there is no sign that Versace, for one, is prepared to give up control rights or sideline family members in the course of its investment round. Private equity investors may find it harder to extract that luxury brand value premium than a pure percentage stake calculation would suggest. And there is always the nagging suspicion that private equity general partners are no more immune to luxury bling than anyone else, and too liable to let their investment judgement falter when dazzled by glitz.