Reduced retail revenue and omnipresent debt is causing many fashion companies to tremble in their stilettos; particularly as they watch their stock take a pounding on the market. Conspicuous spending tends to lose its luster as the market plummets and the fashion and luxury sector is being heavily penalized during this economic downturn. A quick recovery seems unlikely as analysts predict luxury revenues will drop in 2009 for the first time in more than a decade at constant exchange rates. Lowered valuations and slipping stock prices in the luxury sector present ripe buying opportunities for the fashion savvy investor. Deal makers in the fashion field predict that minority investments in fashion companies will be a prevalent trend in 2009.
Minority investments are driven by necessity in the present economy. Many private equity funds are unable to secure financing for a leveraged deal, and instead of sitting on equity they do have, purchasing a small stake is a good option. Companies are open to selling small stakes in this economy because minority investments keep valuations from sinking as much as an acquisition would. Furthermore, many fashion companies are ridden with debt and banks have been unwilling to extend further credit. With an inability to secure debt, diminishing retail revenues and the unlikely prospect of being acquired, minority investments become one of the only ways a fashion company can get any equity. As evident from the graph below, minority investments are occurring in greater frequency, and until the economy stabilizes, this trend will continue to rise.
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Minority investments are increasingly prominent across all sectors, but they fit particularly well with the nature of the fashion industry. For strategic buyers, minority investments give the company an opportunity to spread their portfolio horizontally without the associated risk of diluting brand image. If the investment turns promising, the strategic buyer is well-positioned for an acquisition. A minority investment is also a good way for a private equity fund with little experience in fashion to acclimate to the unique field while the experienced seller retains control. Regardless of the precise motivation of the buyer, private equity funds can buy at a bargain as the stock of fashion and luxury companies continues to under perform the market and companies in need of financing will reduce valuations to reach deals.
Despite the economic distress in the fashion industry currently, investors should note that the luxury sector has traditionally been quick to recover from economic downturns. Aside from the long-term fundamentals of high quality, there is strong luxury potential in emerging markets. Analysts predicts there will be a surge in spending by high net worth individuals on luxury goods, ranging between twenty to thirty-five percent in emerging markets including Brazil, Russia, China and India. A minority investment should only be made in a company with strong potential, and the outlook of many fashion companies is bright, albeit perhaps far into the future. The current economy therefore is a prime opportunity for a private equity fund that can take a long-term vision to slip into some coveted couture; it is rare to find such a piece on sale.