Meet the new retail rivals — two mega-billion dollar private equity players battling it out with what could be the future of the American mall in the balance.
Sycamore Partners’ Stefan Kaluzny and Golden Gate Capital’s David Dominik used to be on the same side, collaborating for more than a decade and cutting deals at Golden Gate. Now they’re working separately and grabbing hold of major pieces of the mall landscape.
The mall is a fitting forum for the two to square off. It has always been a proving ground — the place where competitors go to fight for the hearts, minds and dollars of consumers and where teenagers have gone to see, be seen and, on occasion, settle their differences.
But with e-commerce grabbing so much of the growth and the “B” and “C” malls on retail’s second tier suffering traffic declines, the scene has been set for the two deep-pocketed competitors, both of whom are not afraid of sharp elbows or chasing value where others see retail wreckage.
Kaluzny — known for his piercing intelligence but at times equally piercing bluntness — has a bachelor’s in history from Yale University and an MBA from Harvard Business School. He consulted at private equity biggie Bain & Co. and cofounded grocery concept Delray Farms Inc. before joining Golden Gate Capital in 2000.
There he led the effort to build the firm’s consumer portfolio, with investments in companies such as Rocket Dog Brands, Express, J. Jill Group, Eddie Bauer, Zale and others.
His plan, according to sources, was to go big and acquire a portfolio of retailers that all together would give Golden Gate enough scale and oomph to negotiate better deals with third parties, including mall owners.
But the retail portfolio he built at Golden Gate, while sizable, didn’t afford Kaluzny the commanding position he dreamed of so, in 2011 he abruptly struck out on his own, taking another colleague, Peter Morrow, with him to form Sycamore.
After leaving, Kaluzny stayed on the boards of Golden Gate investments for a time, including Zale, which sources described as an awkward situation that helped ratchet up the tension between him and his former colleagues, including Dominik.
Kaluzny was also working to build a team with at least some familiar faces as he headed back out onto the dealmaking scene.
“He took some people, he’s taken more people over the years, which always alienates the old firm and in doing so, I think he probably upset them,” said one private equity executive. “They compete for opportunities with each other.”
Others have seen the back and forth on associates as in line with the general give and take between funds operating in the same industry.
Out on his own, Kaluzny started by spending an undisclosed amount to acquire 51 percent of what was then Limited Brands’ apparel sourcing business, now called MGF Sourcing. He then moved on and become perhaps the most aggressive acquirer to retail.
Sycamore’s approach to retail dealmaking is a relatively straightforward brand of private equity value investing: Take a struggling company that Wall Street had lost faith in and swoop in to buy it on the cheap in a largely debt-financed acquisition.
But where many private equity companies have dabbled, buying a retailer here or there and flipping it after a few years, Kaluzny had a broader vision and in rapid succession bought The Talbots Inc., Hot Topic Inc., Jones Apparel Group, Dollar Express, EMP and Belk Inc.
Sycamore also invested in and lent to Aéropostale Inc. and bought the intellectual property of Coldwater Creek Inc., which was in bankruptcy and counted Golden Gate among creditors.
All together, Kaluzny has forked out a total of at least $6.5 billion in cash and debt for his string of deals. (As brands came in, some left: Kurt Geiger, Stuart Weitzman and Jones New York were subsequently spun off for more than $950 million.)
This vast collection of stores is helping Kaluzny realize his vision of building a retail empire of scale that can gain negotiating leverage. Many of the brands have some of their collections made by Sycamore’s own MGF Sourcing, which sources said Kaluzny also uses as a selling point as he courts even more deals.
But not all of this has gone smoothly, MGF has come under the spotlight in the case of Aéropostale. The two cut a sourcing deal that gave the retailer a capital boost, but things went south, MGF delayed shipment of goods and the retailer filed for Chapter 11. Aéropostale sued and the two parties will meet in court Aug. 15.
For Sycamore, the final test of success might be what happens to the retailers it owns over time and, if they’re sold again, for how much.
The private equity source noted, “Stefan has been hugely successful since launching, [but] the jury’s still out as to what this looks like in the end.”
As Sycamore went on its growth tear, Golden Gate also kicked into high gear in retail, which bankers in the space attributed to Dominik’s desire to prove to the market that the Golden Gate retail franchise hadn’t walked out the door with Kaluzny.
Golden Gate is the larger of the two players, with more than $15 billion under management as opposed to Sycamore’s $3.5 billion-plus. The private equity firm buys both distressed and healthier companies and has a somewhat unusual structure in that it can invest in companies without fixed time horizons, giving it the ability to hold on to the company it buys longer than many investors. The investing giant could also be seen as something of an incubator given that others have left to build their own ventures, such as Jesse Rogers, another veteran who left Golden Gate to cofound Altamont Capital Partners, which has a stake in Billabong.
Dominik, who like Kaluzny is a Bain alum, oversees a vast operation at Golden Gate with interests far beyond retail, including investments in software, financial and business services, industrials and technical hardware. He is also, like Kaluzny, Harvard educated, with a JD from Harvard Law School and an undergraduate degree from the college.
But while the two share much of the same background, they are also very different. Dominik, for instance, has a particular expertise in technology, having built several companies of scale in the semiconductor and electronics industries.
And, as one source put it, “David’s not emotionally invested, Stefan is otherwise.”
As Kaluzny turned toward building Sycamore, Golden Gate charged on in retail and continued to grow strongly, raising two $4 billion funds after his exit. The firm, which is led by Dominik overall with others focused more specifically on retail, invested in Ann Inc. (a position that translated into a stake in Ascena Retail Group, which later acquired the chain) and bought Payless Shoesource as part of a broader $2 billion deal with a partner to buy Collective Brands, which was then split up. It also loaned Pacific Sunwear of California Inc. $60 million in April and later reached a deal to buy the ailing teen chain out of bankruptcy.
While Golden Gate brought in new retailers, previous holdings such as J. Jill and Zale were sold off as the investment matured, as is usually the case in private equity, but largely has not been the case at the newer Sycamore so far.
The two funds have at times found themselves circling the same properties. In one instance, it was rumored that both Golden Gate and Sycamore were considering a Talbots takeover, a company eventually bought by Kaluzny.
One source said Golden Gate did not seriously pursue Talbots and there is considerable wiggle room in these definitions, with private equity firms constantly evaluating retailers in the market, receiving pitches from retailers and bankers.
If not squaring off directly, they certainly operated in the same space. In late 2013 and early 2014, Sycamore was said to be working to buy Men’s Wearhouse Inc. takeover K&G discount chain, while Golden Gate was in talks to sell its Eddie Bauer business to Jos. A. Bank Clothiers, which was trying to fend off a Men’s Wearhouse Inc. If not directly facing off there, they were certainly playing on opposite sides in an epic men’s wear battle. (One that no one seems to have won, since it was Men’s Wearhouse that ended up buying Jos. A. Bank and is still struggling mightily to make the combination work.)
At times, their deals are seen as defensive plays.
“Stefan rushed to make the investment at Aéropostale,” one source said. “There is some intelligence back and forth. They kind of know what each other is doing.”
That means they can move, when desired, to try to thwart the other.
From the perspective of the sellers, and the bankers who help them drum up interest, having more buyers is always a good thing.
And in a world that can sometimes see experienced investors think their skills in other industries will translate to retail — but with disastrous effects — both Sycamore and Golden Gate are considered as savvy players who know the ins and outs of the sector extremely well.
“They’re the best in the space,” said one banker familiar with both firms. “The Golden Gate guys are not flashy. If you look at it, they kind of stick to their bread and butter, where Stefan has bigger aspirations. He’s an empire builder.”
Dominik has a bigger empire of his own, but one that is not so laser-focused on retail.
Of the sources in the financial and fashion community contacted for this article, none with first-hand knowledge of the dynamic between the two investors would speak on the record, not wanting to alienate a potential client or acquirer, or to rile up a competitor.
But the relationship between Kaluzny and Dominik is described as ranging from that of former colleagues who are now occasional competitors to a pitched and personal battle that’s being fought out in the world of fashion retailing.
Most paint a portrait that leans toward the latter: extremely tough competitors nursing a grudge.
In a statement to WWD, Sycamore Partners said: “Sycamore and Mr. Kaluzny have nothing but the utmost respect for Golden Gate Capital and Mr. Dominik. We are not aware of any conflict between the firms.” Golden Gate said: “Golden Gate Capital takes pride in the achievements of all team members, both current and former. The early success of the funds started in recent years by Jesse Rogers and Stefan Kaluzny comes as no surprise to us. Both spent many years at Golden Gate and both are highly regarded in their respective areas of expertise. We wish them nothing but continued success going forward.”
At the very least, Sycamore and Golden Gate represent extremely potent forces trolling the relatively compact world of distressed mall retailing, each vying for buying opportunities, expertise to find deals and crunch the numbers and leaders to pilot acquired chains.
And ultimately, what they’re both doing is taking a direct hand in reshaping a retail world in the midst of serious and very tricky evolution.
Craig Johnson, president of Customer Growth Partners, said generally of the landscape: “For many of these long-challenged retailers, taking them private with a view to bringing them public again in a few years is a lot like second marriages — the triumph of hope over experience.
“Particularly when the retailer is burdened with a heavy debt load and a shrinking market such as the missy sector, even a strong management team can find that a lower topline due to a declining market simply can’t generate the operating margin dollars necessary to service or retire the debt,” he said.
While the competition between Sycamore and Golden Gate is not strictly a head-to-head, zero-sum game, with other players vying for market share and takeovers, the two can be expected to continue to play an important part in consolidating the market. That means chasing opportunities, buying companies, installing new management, cutting costs, breaking down barriers, believing they can make the American mall work again – at least for their own portfolios and investors.
And there could be some more subtle — or not so subtle — jostling as Dominik and Kaluzny continue to see value in down and out retailers.