It’s easier than ever today to start a company, but getting outside financing to grow a company is as hard as it’s ever been.
And if a successful young brand wants to retain as much independence as possible but needs a cash infusion, it can be even harder. That’s where private equity comes in.
The fashion and beauty industries ties with private equity — investors or often independent investment funds that provide capital to private companies — have deepened over the last several years.
Although results have been mixed, with many private equity-backed apparel retailers hitting bankruptcy after being overleveraged, the firms don’t seem to be going anywhere, especially when they are often the only substantial financial resource that’s willing to take a risk on a relatively new brand.
But any risk is very calculated, as Virginie Morgon, president and chief executive officer of private equity firm Eurazeo North America, and Ryan Cotton, managing director of Bain Capital Private Equity, revealed during a discussion at WWD’s CEO summit.
Below are the investors’ explanations of the brands and businesses they go for and why:
Virginie Morgon: For Eurazeo, it’s in the timing. When you start looking in any industry, you want to be sort of a first comer. I tend to say to the team when we announce a deal, if it’s acclaimed like, people say, “Wow,” “Wonderful,” “How bright,” I start to worry. I would rather have the entire [investment] community thinking that we’re a bit out of our mind, either because it’s difficult to understand or it seems too expensive, and then I think maybe I made the right [deal], in terms of timing and first-mover advantage.
Ryan Cotton: I agree. You know, change is opportunity, but you have to decide who you are in the face of that change and how to capitalize on that opportunity. We want to ride the wave and we want to be on the front end of that and we want to win because we pick winners. There are plenty of other people who do our jobs that like to harvest losers and, you know, hope that they’re buying stability and there are ways to play that game but it’s not the way to us. We try to buy winners. I’m a simple guy, and so I try to reduce things pretty simply and I’ve broken into the heuristic that you’re either on the right side of history or you’re on the wrong side of history. And I’d say 70 to 80 percent of companies are on the wrong side of history today. They’re simply not selling the products the customer want the way they want and they’re not delivering a good deal to the customer. And those are the questions that I’ve sort of reduced this to in my mind. In an age of transparency we know what good is now. You can’t fool us anymore.
On brands focused on single or very limited number of products:
V.M.: I think when you pick a company which is creating a category, I think you have more chance of making a good return on an investment because you’re defining the category itself. With Moncler [a Eurazeo investment], let’s say 10 years ago, it didn’t even exist as a category. More generally speaking, from an investment perspective, being able to pick the category champion or even the leader, the absolute leader and creator of a category, would help a great deal.
R.C.: I think whether you’re running a brand, investing in a brand. there’s really only one question that matters to me, which is “What does your brand stand for?” And the trick of that question is you don’t get to tell me the answer to that, your customer does. Your customer knows what your brand is, or has a sense of it, and they’ll buy it if that resonates with them and they won’t if it doesn’t. And so, when we look at brands we go ask customers, thousands of them, “What does this brand mean? What are the first three words that come to mind when you think of this brand?” And it’s super important because, to me, that establishes, you know, do you even have a brand, does it stand for something and how big is that something that it stands for. Canada Goose [a Bain investment], Moncler — we stand for warmth. There’s a lot of cold people in the world, right, so I can build a pretty big brand if I truly stand for warm.
On what makes a good investment:
V.M.: The question we try to address before we go for it is how long is [the brand] going to last and how sustainable is the growth. But as a start [we use digital tools] to assess how much love the brand has — searching online, searching through social media and these are different tools than we were using even a few years ago. We’re trying to assess whether this is a very strong brand, which helps to get conviction that it is going to last longer.
R.C.: The first question I always ask is, “Do you have a good business and do you have a business that actually makes economic profit?” You’d be amazed how many businesses in our space don’t make economic profit. They’re beloved, they’re very hot they’re things people like to talk about, but they don’t have real economic models. Think about subscription businesses — lots of high customer acquisition costs and they don’t make any money and it’s not clear to me they ever will. So, we may fall in love with the disruptive nature of their businesses model, but [it’s] not making any money and [it’s] never going to make money, so it’s not a real business. So, you have to start with, is it a real business with a real economic model and then how feasible is that model and how good of a deal is it for the customer.
On what brand success means today:
R.C.: The big question, the one I get left with and I can’t answer, but it’s the most provocative, is “Will anything ever really get big again?” L’Oréal was L’Oréal when it was “a” brand. My grandmother bought everything from L’Oréal, that was her brand, and everything she put on her face came from that company. Today, the average beauty consumer is buying 18 brands at a time. They’re promiscuous, they’re trying it all and using it once and throwing it away and on to something else. And so, I think L’Oréal is doing the right thing to by all these brands. But they’re also not going to grow them up to be L’Oréal anymore, and I don’t think that’s even the goal anymore and so, what does success look like? What does big look like? What gets big anymore? I can’t answer that right now.