Private equity turns its attention to retail businesses

The latest management buy out data from KPMG shows that there has been a surge of private equity-backed deals of consumer-facing businesses, with these making up nearly half (42 percent) of total deal volume in the second quarter of 2010.

Such a high level of activity seems, at first glance, counter-intuitive, given that in benign times private equity tended to shy away from the high working capital requirements and low margins often associated with retail.

As a result, perhaps it would have perhaps been expected that this sentiment would be exacerbated by the economic downturn’s effects on consumer confidence, particularly with newly-announced austerity measures.

However, the crucial factor which is making the sector attractive to private equity is that businesses within it have a predictable growth trajectory. For example, if a retailer can be expanded by 20 stores, the growth potential is readily understandable, even if like-for-like sales are tough to drive forward.

As you would expect, private equity has been discerning in the businesses acquired and we have seen specific parts of the sector being targeted. In the past quarter budget retailers such as Poundland have attracted strong interest, as well as retailers with a market-leading product or offer: branded clothing chain Republic and lifestyle retailer Cath Kidston are just a couple of examples of successful deals from the past quarter.

But the second quarter of the year also saw a thaw of distressed deals with three acquisitions completing, all of which were consumer businesses. While the vast majority of private equity deals in recent months have been typified by high prices for high quality business - reflecting the low risk appetite of the market - we have seen a small number of distressed businesses change hands in recent months, showing that some private equity houses are feeling braver.

Source : Helen Dickinson, Head of Retail KPMG