MILAN — The Chinese government’s tighter rules on overseas investment — almost a ban in some cases — have affected sectors ranging from real estate and hospitality to the entertainment industry and, most definitely, on gambling. Now they appear to be crimping some investments in the fashion world.
The scrutiny is tight and outward direct investments nearly halved in 2017 over 2016 overall, though this year they saw a modest rebound. In the January-to-August period, overseas investment amounted to $74.1 billion, a 7.8 percent increase year-on-year, and with retail growing just above that rate at 9.3 percent, according to China’s Ministry of Commerce.
But according to Milan-based sources, the Chinese government’s clampdown on investments is affecting the development of some brands. Rumors continue to swirl over the Milan-based jewelry firm Buccellati, with talk that founding family members are frustrated over a lack of investment in the house by its current owner and indicating Compagnie Financière Richemont as one party that could be eyeing the brand. Richemont had no comment on the speculation.
Last year, China’s Gansu Gangtai Group acquired 85 percent of Buccellati, with the namesake family and private equity Clessidra SGR retaining a 15 percent stake in the company. Gangtai Group, which has investments in a range of businesses, paid 195 million euros for its holding in Buccellati, giving the jeweler an equity value of 230 million euros. Buccellati closed 2016 with revenues of 44 million euros.
At the time, Buccellati chief executive officer Gianluca Brozzetti said Gangtai Group planned to invest 200 million euros to boost the international expansion of the brand over the next five years, channeling investments in the opening of 88 directly controlled stores in that period, of which 27 would be in Greater China.
Sources contend the investments are not really coming through as expected. The company has opened eight boutiques since October 2017 and until May 2018, of which six in China, one in Moscow and one in Sardinia’s luxury resort Porto Cervo, Italy. Buccellati had no comment.
Another brand that has been affected is Caruso, sources say. In November last year, the Italian men’s wear company Raffaele Caruso SpA received an injection of funds from Fosun, its Chinese partner since 2013. At the same time, Umberto Angeloni, chairman and ceo of the company, exited and was succeeded by his eldest son, Marco Angeloni. After being a fixed presence at men’s wear trade show Pitti Uomo and in Milan during fashion week, the brand was noticeably absent from both events in January and June and all communication was stalled, including the series of short stories launched by Umberto Angeloni to illustrate the Caruso brand.
A market source said “originally, all these investments [in fashion brands] were motivated with the goal of achieving synergies on the Chinese market.” In several cases, the acquisitions were too diversified and synergies hard to come by, the source said. The uncertainty also stems from the ongoing changes drawn out by the government. “The market would be entirely different if it were free of centralized influences. There are no strategies in the medium-term. This follows bursts of investments that are often casual, and funded by the government,” according to the source.
On the other side of the Alps, things seem to be going differently. Fosun appears to be actively involved in Lanvin, the storied French brand it acquired in February. In July, Fosun tapped Jean-Philippe Hecquet to become its new ceo and, as reported by WWD earlier this month, according to sources, the French house is in talks with Bruno Sialelli, who recently exited Loewe, where he was head of men’s wear, to become its new creative director. According to a source, the company has “deep pockets” to revive the struggling label “and shouldn’t be affected since it’s small fry in the big scheme of things.”
Bally also continues to expand under Chinese owner Shandong Ruyi, as does SMCP, the owner of Maje, Sandro and Claudie Pierlot, also controlled by Shandong Ruyi Group. SMCP was listed on the French stock market in October 2017, generating funds to finance debt payments and fuel international expansion.
The purchase of another historic French label by Chinese buyers has thrown the spotlight on such investments: The Chinese label Icicle convinced a Paris commercial court that it had the most compelling offer for struggling Carven, which had filed for bankruptcy. But a number of recent transactions show they don’t always turn out to be clear-cut cases of cash injection.
A luxury goods analyst who spoke on condition of anonymity said it was “difficult to distinguish if the stall in the progress of a brand is caused by limited investments or limited knowledge.” Usually, a buyer maps out a detailed five-year plan but the source indicated that “the acquisition [often] seems more impulsive than planned and that, in any case, given the scarce information released after an acquisition, the developments are difficult to interpret. Luxury M&As require money, management and a strategic plan, and not always do we see the three elements together. In this industry, there is a lot of communication, but Chinese investors often don’t communicate enough. And they appear to learn as they go along.”
“For some, the biggest step is the acquisition, once that is done, it’s all done, that’s it,” another source contended. “But it’s not the same as buying a cow and simply knowing you’ll have milk, or chickens and waiting for them to lay eggs,” said the source with a laugh. “Luxury goods need investments.”
Michele Norsa, luxury strategic adviser and vice president of the Missoni Group, does “not think Chinese investors’ appetite for luxury brands has diminished.” He said that what they are sometimes lacking is a global strategy. “Companies in China are developed as start-ups and they grow very quickly locally. Investors tread more easily in China as they have more knowledge of their domestic market. In the luxury segment, you need a global strategy, plans and structure.”
In new guidelines unveiled by the Ministry of Commerce on Jan. 25, it said investments are encouraged in countries involved in the Belt and Road infrastructure, or in areas related to high-tech and advanced manufacturing industries. Investments of more than $300 million, or those involving investors running at a heavy loss, among others, are discouraged.
“No new investment projects were reported in real estate, sports or entertainment, which used to draw a plethora of irrational funds from the country,” Chinese news agency Xinhua said on Sept. 22.
Whilst retail is an industry not targeted as “irrational” by Beijing, companies may be reluctant to put themselves under scrutiny for a deal of substantial size or to broach an area that is seeing tightening and shifting rules.
A banking source said the Chinese government’s reining in on investments has been going on more or less for the past two years, with fashion and retail being less affected than other sectors, given its smaller size.
“As an example, the Chinese authorities blocked a big deal to buy a waste management company in Spain at the very last minute a year or two ago,” the source said. “So companies tend to ‘censure’ themselves in anticipation of disapproval from authorities and not go for deals that could land them a tussle with authorities.”
The source added that fashion and retail groups are likely less affected given the smaller size of the industry.