The classic retail LBO starting to look vintage – Axios
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Illustration: Annelise Capossela/Axios
Before the turbulence of the last decade, retail LBOs followed a clear model. But with rich valuations and a low appetite for credit risk, retail has seen a dearth of traditional leveraged buyouts, even as the industry slowly emerges from the pandemic.
Why it matters: Private equity firms with dedicated retail practices will have to be more creative about how they invest in the sector going forward.
By the numbers: After spiking to more than $6 billion in the first quarter of this year, North American retail buyout volume sunk to less than $1 billion in the third quarter, Mergermarket data show.
Between the lines: Industry sources said credit markets are only willing to lever traditional retailers up to 2.5 X EBITDA currently, a decrease from up to 4.5 X in the first half of this year when buyouts of both Michaels and At Home group were transacted.
Investments in 2021 by Sycamore Partners, a private equity firm historically dedicated to retail LBOs, consisted of providing debt financing to apparel retailer Express, purchasing cruise ship assets from Royal Caribbean Cruises in an all-cash deal, acquiring Ste. Michelle Wine Estates and adding a bolt on to portfolio company Pure Fishing, for example.
What they're saying: "I think there are three types of retail investments that will continue to attract investor attention: site-based services, experiential concepts that can drive traffic and brand banner stores that serve as customer acquisition channels in a more diversified channel landscape," said Ryan Cotton, a managing director and global head of consumer at Bain Capital Private Equity.
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Illustration: Shoshana Gordon/Axios
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Illustration: Annelise Capossela/Axios
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