Barneys is part of a complex picture at Perry Capital, which is said to have suffered a 12 percent loss last year and has subsequently seen some investors pull money out.
According to the Securities and Exchange Commission, as of June 2 this year, the hedge fund had $8.3 billion under management — down from $11.6 billion in March.
While Perry’s goals are not entirely clear and his office did not return a request for comment, financial sources familiar with the situation said the withdrawals leave Perry hungry for new money and eager to sell a minority piece of Barneys at a premium.
The Pop Art-loving investment guru, who bought his first Armani suit at Barneys in the late Seventies and went on to gain control over the tony retailer in a 2012 debt swap, has just hired Goldman Sachs to sell a stake of the company.
It is presumed that the billionaire hedge fund manager would retain his majority stake in the business.
Sources say Barneys, in the eyes of Perry, is something of a trophy asset. He has expressed an affection for the store as a longtime shopper, and he is married to fashion designer Lisa Perry. But his portfolio is devoid of other retail assets aside from a debt stake in J.C. Penney Co. Inc.
Of the 26 Perry Corp. investments detailed on S&P Capital IQ, 14 are in the finicky financial sector. The firm also has six direct investments in the consumer discretionary space, including Barneys and Penney’s.
And the portfolio is in some flux. Perry and WCAS Management last month unwound their combined stake in Universal American Corp., selling the health-care company back debt and stock for a total of $115 million.
Last year was a tough one for hedge funds in general. The HFRI Fund Weighted Composite Index fell 1.1 percent with 979 funds liquidating, the highest number of failures since 2009, according to Hedge Fund Research Inc.
And a number of big-money private equity investors with high-profile retail investments find themselves with debt-heavy assets operating in an uncertain market with no easy exit on their investment.
TPG Capital and Leonard Green & Partners teamed up with J. Crew chief executive officer Millard “Mickey” Drexler to buy the retailer and take it private in 2011, but performance has been uneven and its total debt tops $1.5 billion. Corporate bonds that are tied to the company come due in 2019 and are trading at 34 cents on the dollar.
Ares Management and the Canada Pension Plan Investment Board bought Neiman Marcus Group Inc. from TPG and Leonard Green for $6.1 billion in 2013. The investors tried to bring the luxe retailer public again last year, which many saw as an effort to ease its $4.8 billion debt load, but the initial public offering stalled in a turbulent market.
Other investors are seen ratcheting down their exposure to the retail world ahead of what could be a rough spell, potentially made rougher by the shock caused by Britain’s vote to exit the European Union.
In March, giant Kohlberg Kravis Roberts & Co. agreed to sell its majority stake in SMCP, corporate parent to Sandro, Maje and Claudie Pierlot, to Chinese textile firm Shandong Ruyi Group in a deal estimated at 1.3 billion euros, or $1.45 billion, including debt.
Perry is believed to be seeking additional finances to support further advancements at Barneys. Since buying the business, he’s been pouring capital into it, including creating the four-level 58,000-square-foot Barneys Chelsea store, which opened in February; a three-year renovation of the 230,000-square-foot Madison Avenue flagship, and renovations at the Beverly Hills store. In addition, since 2011, around the time that Mark Lee, chief executive officer and Daniella Vitale, chief operating officer, joined Barneys, the company has been developing greater digital and omnichannel skills and services.
For Barneys overall, growth will be primarily organic, springing from existing stores, renovations, advancing style and through barneys.com. Of the company’s 16 stores, the “flagships” are on Madison Avenue and now Chelsea, and in Beverly Hills, Chicago, Seattle, Boston, San Francisco, Las Vegas and Scottsdale. Barneys also operates 11 outlets. No more openings are on the agenda, though Barneys has been considering another expansion move — becoming a third anchor inside Bal Harbour Shops in Bal Halbour, Fla. No lease has been signed and a deal would be contingent on Bal Harbour Shops expanding.
“I’ve spoken to Mark [Lee] and Richard [Perry] on a number of occasions about opening a store,” said an upscale shopping center owner. “It was timing issues, internally. I haven’t spoken to them recently. Since then, Barneys has gone much more toward a digital kind of platform. It’s questionable whether they would do any more bricks-and-mortar stores. All these department stores aren’t doing well. Richard is a hedge fund guy. He’s very smart, but this isn’t his business.”
News of Perry’s intention to sell a minority stake in Barneys was first reported in The New York Post.
Strongest growth right now at Barneys is coming from digital sales and the new Chelsea unit, according to an inside source, shoe noted the Chelsea store is exceeding expectations.
According to several industry sources, financially, Barneys isn’t in bad shape considering the retail climate, and that there are no concerns among vendors. Growth for 2016 so far is about flat; last year, Barneys reportedly posted a loss of more than $5 million, but generated a profit for the year ended Jan. 30, 2015.
At the opening of the Chelsea store, Lee told WWD that Barneys “had headwinds” in 2015. “But we still had a growth year and we’re confident in the results.”
“While certainly not easy, we still feel very good about the year,” added Vitale. “We were actually pleased where we ended up. We are poised and positioned in a good way.”
Lee was not available Wednesday to discuss Barneys, or his future at the store. Speculation that he is leaving has been around for months, which Barneys has previously denied. A source close to the company said Wednesday that Lee plans to continue in his role as ceo “for the near future,” with Vitale continuing as coo. Other sources indicated that Vitale could transition into the ceo role if Lee did one day depart.
Another issue facing Barneys is its rent on Madison Avenue. Barneys has been enjoying favorable rents at its Madison Avenue flagship ever since it emerged from bankruptcy in 1998 and commenced a 20-year lease in 1999. It has renewal options beginning in 2019, but that’s when the rents are subject to market rate adjustments and would theoretically skyrocket.
Sources told WWD on Wednesday that the lease continues to be under negotiation and that it would be highly unlikely the Madison Avenue site would be abandoned by Barneys. However, Barneys is in for some hardball negotiations with its landlord, Flagship Capital.
With the future market rate adjustment, Barneys’ rent on Madison Avenue might at least double, with estimates ranging from well over $30 million to topping $40 million.
While Madison Avenue rents have soared over the last several years, this year, there has been some softening of the market, which could help Barneys’ bargaining position.
Business has been rough across most of retailing, particularly the luxury sector. It’s not likely Barneys would transcend the trend. The luxe consumer, who is very attuned to the value of their stock portfolios, is especially wary after Britain’s decision to exit the EU rattled global markets. And Barneys promotions seem more aggressive, and the web site touted 75 percent off select designer styles on Wednesday. Historically, the store has been less promotional than the competition, and despite its ups and downs, including a bankruptcy and a succession of ownership and management changes, Barneys has always managed to maintain its brand cache and exclusive assortment.
A lender said the specialty chain has been fine-tuning its vendor base, orders for some vendors have been increased and Barneys has been paying its vendors on time. He also said Barneys has been “growing somewhat” and adding vendors this year to its matrix. A credit analyst also confirmed the retailer has been paying invoices on time.
Gilbert Harrison, chairman of investment banking firm Financo Inc., said, “Barneys is a great franchise. The question a lot of people are still asking is ‘How does it grow?’ The company needs money for expansion.”
Harrison speculated that any investor would likely be a U.S. strategic player, or possibly an Asian sponsor looking to gain a foothold in the U.S.
Jeffrey Edelman, director of retail and consumer advisory services at RSM McGladrey Inc. and former retail analyst, said, “The business model in retail has changed substantially,” noting that the changes over the years have also impacted the aspirations of financial buyers. He explained that an investment a few years back might have looked like a good bet, but then came the new paradigm with online competitors, technological investments to track inventory and develop omnichannel operations. Suddenly the financial sponsor “sees other assets that can make more money. When that happens, an investment in retail doesn’t make sense anymore. What was an asset acquired on the cheap that could be bailed out by an economic rebound is not happening now. The tables have been turned dramatically.”
Istithmar World is the investment firm that acquired Barneys New York in June 2008 for $942.3 million from Jones New York, sold a majority stake in the retailer to Perry Capital in May 2012. Perry was already a large bondholder in Barneys, as was Yucaipa Cos. Following the sale, Istithmar retained an 8 percent stake in the retailer. Private equity fund Yucaipa Cos., run by Ronald Burkle, took on a 20 percent stake in Barneys as an investor. All three — Perry Capital, Yucaipa and Istithmar — each have one seat on Barney’s seven-member board.
Neither officials at Yucaipa nor Istithmar responded to requests for comment at press time.
As one banking source said, “If you have a portfolio that hasn’t been doing so well, crystalizing some of your gains for now and looking smart is probably a good thing if you’re going to try to convince people to stay in [the larger fund]. Having a win is never really a bad thing.”