Luxury goods still a playground for private equity

The credit crunch has failed to put the squeeze on private equity's interest in luxury goods, said financiers, deal advisers and luxury goods executives at the World Luxury Congress this week.

Moreover, such is the demand among funds to enter the high margin, high growth sector they are considering a shift away from their traditional buyout strategy of acquiring control and may instead opt for minority stakes just to gain a foothold.

Private equity is here, it is here to stay and it is going to buy up more luxury companies, KPMG Partner and UK head of consumer markets David McCorquodale told delegates.

After several years of buying smaller luxury firms, private equity's dalliance with high end retail hit the headlines in May when Permira beat Carlyle to gain control of Valentino Fashion Group in a deal worth more than 2.5 billion euros ($3.6 billion).

McCorquodale said 2007 would prove to be the biggest year yet by value for private equity deals in the luxury sector, even though the deal total so far ranks below 2006 -- suggesting there could be more buyouts to come before the year is out.

One industry executive, who asked for anonymity, said private equity firms were in negotiations for minority stakes in Italy, considered a treasure trove for luxury deals because the market consists mostly of small or mid-sized family businesses.

Carlyle, after losing out on Valentino, has said it is still looking at the market. Blackstone, Axa, Apax, KKR and TPG are other large funds active in the luxury retail sector.

STELLAR GROWTH

Permira's Valentino buyout sprung from the stellar growth rates predicted for luxury goods on the back of surging demand for status symbols from the rising middle classes in China, Russia, India and the Middle East.

Research from Italian investment bank Mediobanca forecasts sales of leatherware -- which delivers a return on investment of 25 percent compared with 15 percent for the luxury business at large -- rising 14 percent within five years.

Growth statistics like that are far too tempting for many people, McCorquodale said.

Executives, including Daniel Piette, president of LV Capital Management, the private equity arm of the world's largest luxury conglomerate LVMH, said demand from emerging markets had protected luxury from the subprime crisis.

The relatively smaller size of most mid-sized luxury companies -- with capitalizations of several hundred millions euros -- meant private equity still had the cash to do deals.

The credit squeeze won't change a lot for the companies we are speaking about, said Dominique Senequier, founder and chief executive of Axa Private Equity. Senequier said while the crunch has hit large buyouts, the several hundred million euros needed for luxury deals were still possible.

But high prices being demanded by fashion entrepreneurs could still scuttle deals, financiers and executives said.

Italian designer Roberto Cavalli, who is mulling a stake sale, on Thursday said in a Reuters interview his company was worth 2 billion euros, having only a month ago said he believed it was worth half that much.