Why Private Equity Firms Are Still Taking A Risk And Investing In Retail

4 weeks ago  •  By  •  0 Comments

We’ve all heard about the doom and gloom of the retail sector: How Amazon has taken over and the way we shop has all but completely changed from our parents’ generation.

But it’s worth remembering that investors haven’t yet abandoned the market.

Instead, private equity firms are having to shop smarter themselves in order to ride the waves of what comes next on the investment horizon and interpret what the consumer will want next.

Retail is more attractive

Let’s be honest: an alarming amount of private-equity-owned retailers are filing for bankruptcy at the moment. With Arcadia splashed across the news and rising concerns over the Great British High Street, it’s understandable that this type of retail is on the decline.

But there’s good news for the canny investor. Retail is more than attractive when it comes to growth. If played correctly, the field offers opportunities for large gains when the market rises.

You can track these individually into seven segments: automotive, building supply, distributors, grocery and food, online, general and niche. But they tend to track together, although sometimes they can be volatile.

Still, in a bull market this means that the gains are much higher, anywhere from between 3-44% according to Investopedia.

Shopping Mall

Lifestyle and habits

The lasting change from the past decade has been a consumer’s attitude to purchasing: the sky-high expectation of online shopping, rapid delivery and efficient returns. That’s why retailers who have an impressive digital presence are finding themselves a much more desired investment than those still playing catch-up.

For those that started their business online, there is good news, as many now find themselves with homes on the high street driven by direct traffic.

Take Joe Browns, who started life as a mail-order retailer, and is now opening its second store at the McArthur Glen retail outlet in York after footfall success in their first store in Meadowhall, Sheffield.

Ongoing protection

Still, this shakeup of the industry offers many opportunities for investors – if they do their homework. Although it is not a private equity firm’s job to ensure the success of a business beyond their investment, ultimately retail offers high gains for the right investor.

A cautious approach is advised. In particular, within peer-to-peer investments, which have hit the retail industry hard. Earlier this month the Financial Conduct Authority took steps to ensure that investing in retail is protected, by limiting to 10% the amount of money a single portfolio can lend each year. It is to help lenders stop ‘over-exposing’ themselves to risk.

The FCA did, however, acknowledge the exciting market that retail offers and these new rules will make sure that investments are covered under the Financial Services Compensation Scheme (FSCS).

Peer-to-peer, or where investors make loans to individuals or companies through a platform is incredibly popular, and the Government responded by launching the Innovative Finance ISA in 2016. This allows investors to gain returns free of capital gains tax and income tax. But crucially, P2P does not offer the same capital protection of a Cash Isa, where up to £85,000 is protected in the event of a firm going under.

“Innovative” investment opportunities

In a statement, Christopher Woolard, executive director of strategy and competition at the FCA said: “These changes are about enhancing protection for investors while allowing them to take up innovative investment opportunities.”

Still, with the number of private-equity backed businesses quadrupling in the United States from 2000 in the year 2000 to 8000 by 2018, it’s clear that growth is the key deciding factor when it comes to successful investments.

With the retail market able to offer such large gains for the right investment, it’s no wonder that private equity firms are investing in digital savvy retail companies that know their markets.


Subscribe to our monthly newsletter for a collection of our selected thought leadership, case studies, news and favourite curated reads. One for the inquisitive…