All around the world there are great examples of businesses and industries that always appear able to attract lucrative private equity investment. These include green technologies research groups and energy companies, to name but two.
One industry that faces a constant struggle for private equity investment is retailing. Don’t be fooled into thinking this is a consequence of the global credit crunch, either. Retail has always struggled to attract investment, particularly over the last 10 to 15 years when the pinch has hit home.
What are the biggest reasons why industries or businesses fail to attract investment, and how do these relate specifically to retailing?
Lack of Growth
The simple fact is that retailers, excluding the supermarkets, are almost all exclusively struggling to hit any form of growth. Yes, you see many businesses with reduced sales but higher profits; however, this is clearly down to cost cutting and will never be a long-term sustainable business model. Costs can only reduce so far before they can’t go any further, or begin to have a serious impact on operations.
Blame for lack of growth in physical retailing can be laid firmly at the door of the internet. An obvious solution would be for traditional retailers to focus on their e-commerce streams. While this does happen, many are so far behind due to the prolonged successes of the likes of Amazon and eBay that it makes little to no impact on their overall result.
Those that continue to grow, such as the supermarkets, are attractive investment opportunities, but are often so lucrative that those currently invested aren’t likely to move aside.
If you read a report about a retailer struggling or involved in controversy, the names of any investor will not be far behind when it comes to being dragged through the mud. The reputation that retail has gotten itself as a dying industry doesn’t help. With an industry littered with failed management buyouts and little in the way of value to be added, it is no surprise that the biggest private equity investors are staying well away.
When a retailer fails or is struggling, in come the administrators looking to sell on the company. Trouble is, they often do very little to make the opportunity an attractive one. In many cases potential investors are being asked to pay a fee for the business as well as take on spiralling debts. With margins in the industry notoriously difficult, why invest in a failed business when it would be cheaper and less risky to start a new one?
In the modern era, only the very best retailers, who have a track record of performing and attracting customers even in difficult times, and against the continuing growth of e-commerce, stand any chance of securing private equity investment.
Dealmarket is a recent start-up company that offers an extensive, global private equity platform. Dealmarket is used by private equity investors to source opportunities, as well as by entrepreneurs and businesses seeking investment themselves.