Private Equity and the Retail Industry

The season for holiday shopping has just come to a close; so what better to discuss than retail?  The relationship between private equity and the retail industry is controversial, but can ultimately benefit both parties. 

Shopping is continuously becoming more virtual, which poses both an opportunity and a challenge for retailers.  Retailers that successfully translate traditional brick-and-mortar stores into a viable online presence, or partner with online giants such as Amazon, can see a great deal of upside, but retailers that cannot effectively transition have a significant uphill battle.  While packed malls during the holiday season have always been a staple, there are a growing number that are foregoing the mall and shopping for their loved ones from the comfort of their couch. 

The ease of online shopping, coupled with lingering challenges from the recession, have led some retailers that have not been able to adapt to the changing times to face going out of business. Private equity firms offer an alternative.  PE firms step in with the goal of bringing the retailer out of debt and eventually selling the company for a profit.  The benefits to partnering with a private equity firm include:

  1. Availability of capital
  2. Involved investor
  3. Goal of maximizing value

A private equity firm can bring resources and expertise to the table that give a much better chance to these struggling retailers.  In turn, PE funds receive management fees for their involvement with the retailer, have the potential for dividend payouts for their investors and can implement strategies to turn the company around in ways that maximize value to the retailer and to the PE fund investors.  

There have been challenges to PE involvement in retail.  Prior to partnering with the private equity firm, many of these retailers are already headed in the direction of bankruptcy, and some do not seek private equity involvement until they have already started bankruptcy proceedings.   In addition, the sector has become seemingly less attractive to private equity investors as they are not making the returns they used to. 

Innovative thinking and a fresh way of looking at the industry could provide a competitive advantage as the need for strategic partnerships arise for retail companies.  Private equity funds are consistently evaluating how they can effectively balance the goal of bringing retailers into the black with the duty they have to their investors to maximize returns.  Some of the ways in which a private equity and retail partnership could be most successful include:

  1. Having a fund manager that is experienced in retail
  2. Eliminating poorly operating segments or stores while investing in the growth of successful ones
  3. Implementing initiatives that personalize the shopping experience for consumers
  4. Avoiding strategies that add burdensome debt to the retailers

While the relationship between private equity and retail continues to evolve, we can at least hope our favorite stores see a well needed boost this holiday season.

Jennifer Lynch is an Audit Manager in the Financial Services Group providing audit and accounting services to clients in the insurance, private equity and venture capital industries.

* Required