Counting on Geiger

Graphite Capital's latest deal positions the private equity firm in the gentle lap of luxury. But with tough times ahead in retail, is Kurt Geiger really the best place to be? Patrizia Rossi reports.

It’s not only shoppers who have an eye for a bargain. The reduced availability of debt and a major pulling back in consumer spending have created ideal buying conditions on the high street for vigilant mid-market private equity houses.

In December, Exponent Private Equity took a majority stake in designer handbag firm Radley in a secondary buy-out worth £130 million. Bridgepoint Capital followed suit in February, sinking its teeth into Pret A Manger in a deal that saw the upmarket sandwich business change hands for £345 million.

Graphite Capital, which invests in companies worth £25-200 million, has also been active in the mid-market since the credit squeeze, most recently acquiring luxury shoe retailer, Kurt Geiger, from Barclays Private Equity for £95 million.

Rod Richards, Graphite Capital managing partner, believes the £95 million price tag reflected the problems facing the credit markets: “I think Kurt Geiger would have gone for considerably more if it had been sold six months earlier.”

He says the upmarket shoe retailer is an attractive investment because of the management, which has worked hard to innovate and diversify the shoe business since the original Barclays-backed £46 million buy-out from Harrods in 2005.

“Since the original buy-out, the management team has opened up a number of opportunities, which haven’t been fully exploited as yet, such as a distribution channel to the Middle East and designing private label products for well known retail brands,” says Richards. “These interesting developments are at an early stage. The real test will come over the next two to three years as to whether these good ideas turn into profit.”

A lull in luxury

Many forecasters predict a tough year ahead for retail. However, Simon ffitch, Graphite senior partner, is sceptical of the likes of M&S executive chairman, Stuart Rose, who says the consumer downturn could last until mid-2010. “I think you can safely say that things will get worse before they get any better. However, wealthy consumers are not as exposed to mortgages, so luxury retailers won’t be as badly affected in the downturn,” he observes.

Revenues at upmarket jeweller Tiffany & Co tell a different story as cautious luxury-goods consumers have caused sales to slide at the US company. Closer to home, Burberry’s sales figures recently failed to hit target. All of which suggest there is a slump in consumer spending at the high end as well as on the high street.

Richards shrugs off the gloom, adding: “When you buy a business, you have to examine whether the business has enough strength to get through a recession. We are not buying businesses to sell them in the next two years. Just as long as the business is ultimately more profitable when we come to sell.”

“We wouldn’t consider a deal, unless we thought we could double our money on it,” he says.

High street up for grabs

The retail sector has always appealed to private equity due to the attractiveness of its property assets, steady income streams and business models that can be rolled out nationally as well as overseas. ffitch observes: “We have done a lot of retail because we like the concept of understanding how an operation works in a particular location and then replicating it.”

Graphite, of course, has an enviable track record in retail and has enjoyed a string of successful exits, including Maplin Electronics, Wagamama, Ottakar’s, Paperchase and Game, which have delivered extremely high returns – Maplin and Wagamama made ten times return on their original investments in 2004 and 2005 respectively. Graphite still holds on to a 10 per cent stake in the noodle bar chain.

Richards says: “Over the last few years, everything [retail] was priced highly and people were falling over backwards to buy everything. We’re now out of all our retail investments and are barely exposed to the high street. Kurt Geiger is our only retail investment at the moment.”

Actively recruiting

The Kurt Geiger deal followed the £100 million buy-out of Alexander Mann Solutions (AMS) as the second acquisition from the firm’s £555 million fund, Graphite Capital Partners VII.

Graphite backed the secondary buy-out from Advent International in December. Despite investments across a range of sectors, including healthcare, manufacturing and leisure, Graphite is seen to be a serial investor in recruitment, with the Huntress, Mailroom Management Services and Aktrion deals under its belt. “These recruitment businesses were well managed and have grown their profits on the back of a strong economy, and we have been able to exit successfully,” says ffitch.

However, ffitch would argue that AMS, which generated £340 million turnover in the year to September 2007, is unlike Graphite’s other recruitment businesses. “AMS provides Recruitment Process Outsourcing (RPO) to blue-chip companies. It came from within a larger recruitment business that was failing and we think it has the potential to be the number one global provider of outsourced management services as it takes over the recruitment function of large international corporates, such as Deloitte and Vodafone.”

Despite double-digit growth forecasts for the RPO market, ffitch concedes: “The recruitment market can get just as gloomy as retail in a recession. If there’s a downturn, there won’t be natural organic growth in the business, but we’ll be happy if we win three or four big clients. If it’s a really good business that you’re not going to sell for three to four years, then the recession is no reason not to buy it.”

Credit crunch

Richards and ffitch aren’t jittery about the credit crunch. They believe debt funding issues and the effects of the credit crisis will help to cool an overheated market, pushing prices down in the short term – as demonstrated by their recent deals, which they believe would have gone for top dollar if they had completed in early 2007.

Richards says: “On the buy side, it’s not all bad news as pricing has gone down. In the mid-market, you can still get debt to do deals albeit at a lower amount than you would have before. However, the credit crunch isn’t great news at the top end of the market because of the logistics of putting together big syndicated debt packages.”

Over the last two years due to the maturity of a number of its investments, Graphite, which has more than £1 billion under management through its three private funds and its listed investment trust Graphite Enterprise, has been actively making disposals. “We were lucky that we sold everything that needed to be sold in the last 24 months,” adds ffitch.

Despite a number of impressive investments to their name, Richards and ffitch, who have been with Graphite since 1986 and 1992 respectively, steer clear of formality. They believe that regular, informal contact with management plays just as important a part in a relationship with a portfolio company as board meetings. They see one of their main roles as bringing in discipline and processes, such as “proper” financial reporting structures.

“We prefer not to come across as a bunch of pinstriped suits. For some people, we might be a friendlier home than others,” says Richards.

Public perception

Richards illustrates the point with an example from close to home: “Where I live in Putney says a lot about what private equity does. Ten years ago, it was a fairly deserted high street. If you look at the businesses we have backed, there is a Wagamama, Maplin, and Game, and there was an Ottakar’s too. These came to about 30 per cent of the quality outlets on Putney High Street.

“It’s a myth to believe that our industry has got wealthy by firing people. If you try and put a business up for sale when you have got rid of the staff and sales are going backwards, you don’t get a good price for it. So, to get a good price, we have to demonstrate growth potential.”

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