Made in Italy Fund

Luxury fashion à la mode for private equity buyers

Europe’s luxury fashion brands are proving increasingly eye-catching to private equity buyers, with some raising dedicated vehicles to invest in the space, causing valuations to creep ever higher.

The sky-high valuation of Versace at €1.83bn, which equates to 41x the company’s 2017 EBITDA of €44.6m, has shone the spotlight on the luxury fashion market, despite challenging industry trends triggered by digital transformation and a new competitive landscape.

Blackstone, which exited Versace reaping a 74% return on investment, is not the first private equity player to have scored a high-profile exit in the sector. Carlyle’s luxury coat brand Moncler listed on the Italian stock exchange in a €1bn IPO in 2013 – one of the biggest ever flotations in the European luxury sector – and Permira made a 2.3x return on its Valentino and Hugo Boss investments in 2015. More recently, Ergon Capital Partners garnered a high return on Golden Goose, Trilantic Europe successfully exited its investment in Betty Blue, and Piper Private Equity sold tailored swimwear brand Orlebar Brown to Chanel.

The influx of private equity investors into fashion has tangibly grown, and the industry has seen several large deals backed by private equity in recent years. In the first half of 2018, the sector recorded nine deals, while only six were inked between January and June 2017 and four in the first half of 2016, according to Unquote Data. Furthermore, the aggregate value of all deals closed over the course of the semester was just shy of €1.4bn, and 2018 as a whole is on track to surpass the high levels recorded by the industry in 2017.

“To invest successfully in this type of environment, it is essential to choose carefully among the opportunities available and back a company able to create a unique product” – Massimiliano Caraffa, Carlyle


On trend

Several private equity firms have developed dedicated strategies and established in-house investment teams composed of market experts who are able to grasp the trends and recognise the best assets in the industry. One such firm is Carlyle, which has considerably increased its investment in the sector in order to diversify from its initial industrial focus.

After successfully selling Valentino and Hugo Boss to Permira and exiting Moncler in the aforementioned IPO, the firm wholly acquired luxury trainer designer Golden Goose in 2017 in a deal valued at around €450m. The Italian brand was brought into a portfolio that already included womenswear label TwinSet and lingerie designer Hunkemöller.

“The sector’s dealflow is rich and market sentiment is thriving, with valuations that have doubled in the past 10 years and are still moving up, reaching 14-15x EBITDA,” says Massimiliano Caraffa, a director at Carlyle. “To invest successfully in this type of environment, it is essential to choose carefully among the opportunities available and back a company able to create a unique product capable of surviving the volatility of market trends.”

In addition to large international funds like Carlyle, some local players have recognised the potential of the fashion industry and have started increasing their investments in the sector. Italian GP FSI recently acquired a 41.2% stake in fashion house Missoni from the company’s founders via a €70m capital increase. In France, Apax Partners, BPI France and Maisons du Monde founder Xavier Marie acquired cashmere brand Eric Bompard in a deal that valued the business at around €130m.

“Made in Italy Fund will seek investment opportunities in key sectors within the Italian economy, with potential for international expansion” – Walter Ricciotti, Q Group


Followers of fashion

The opportunities offered by the sector have led to the emergence of dedicated vehicles that invest a large proportion of their capital in fashion brands. Italian GPs Progressio, FSI and Milano Investimenti Partners have recently launched such funds, and French firm Eurazeo last year created a specific division, Eurazeo Brands, with an investment capacity of up to $800m, dedicated primarily to the fashion and beauty industries. Q Group, in partnership with luxury and fashion advisory firm Pambianco Strategie d’Impresa, is raising a new vehicle with a focus on fashion, beauty and design called Made in Italy Fund. It has a €200m target and expects to reach its final close by June 2019.

Q Group CEO Walter Ricciotti says: “Made in Italy Fund will seek investment opportunities in key sectors within the Italian economy characterised by the combination of creativity and manufacturing expertise, and with potential for international expansion.”

Despite strong dealflow and the proliferation of fashion-focused vehicles, the domination of private equity funds in the sector is increasingly threatened by the fierce competition of newcomers and industrial players. Large M&A operations conducted by industry competitors, such as the acquisitions of Jimmy Choo and Versace by Michael Kors, are becoming increasingly common in a landscape where consolidation seems to be the key to success.

“We have seen increasing competition coming from strategic players in the European luxury and fashion market compared to 10 years ago,” says Caraffa. “These companies are focusing on M&A because the market is in a transition phase, and pursuing a buy-and-build strategy can be the only way to reinvent the business and survive.”

The competition has also extended geographically, with an increasing number of Asian and Middle Eastern players – both industrial and financial – eager to enter the market and able to bet big on fashion.