Fashion. Maybe the clue is in the name because brands and companies go in and out of style, making the sector seem risky for long- or even medium-term investors, especially in a consumer market that’s reliant on discretionary spending. And this is even more of an issue when consumer confidence is challenged.

“That ‘fashion’ word particularly turns private equity off,” says Lorna Hopkinson, a managing director in the BDO M&A team, who covers retail and consumer brands. “When you’re talking to private equity about a footwear or swimwear brand, you can say it’s a commodity product – everyone needs shoes, fine. But the minute you say it’s a fashion brand, most people are turned off. Unless you are one of the very cool, high-growth, Gen Z-targeting brands that has insanely enormous communities and is seeing phenomenal growth, fashion turns off private equity. Trade will still look at it, but only if they can see the right synergies and fit.”

But there are signs of recovery in M&A in the sector, according to PwC partner and UK head of retail Jacqueline Windsor, who believes this is driven both by improved consumer sentiment and by private equity’s continuing need to invest. “We are seeing green shoots in terms of deal activity in the fashion space,” she says, “and that is driven by both supply and demand. Demand, because consumer spending is recovering sentiment; spending on clothing was one of the worst affected categories over the past couple of years, but that is looking more optimistic. And on the supply side, which is equally important, private equity is sitting on dry powder and they’ve got to invest the money they have raised.” 

Threads of hope

The market is moving on from what Windsor calls “a couple of dire years”, and she identifies four types of deal that are on trend. “One is attractive fashion brands, where there’s a lot of brand heat. Second is attractive business models, for example, a circular fashion brand,” she says. (Circular fashion is where apparel is responsibly manufactured and recycled to minimise waste and environmental impact throughout its lifetime.) 

Windsor continues: “Third, from a strategic point of view, is portfolio rebalancing – both divestments and acquisitions. And then the final thing, which I think is really interesting, is acquisitions across the value chain, which could mean luxury brands buying tanneries for security and supply, or others buying tech-enabled businesses for their capabilities.”

Hopkinson also sees consumer sentiment improving, with BDO analysis leaving her “feeling a bit more positive that the consumer is coming back in terms of some of their willingness to spend”. But, she adds: “The reality is that we’re in a cost-of-living crisis, and the consumer is more challenged. When you look at businesses and their cost pressures, they are producing less profits themselves, and therefore have a reduced buyer pool and are fundamentally likely to have lower valuation expectations.”

Bulk buying

A look at the trade buyer pool shows that there haven’t been too many transactions in the past couple of years. “A lot of private equity has sat on consumer assets that they’re looking to exit,” says Hopkinson. “Next and JD Sports have been swallowing up brands but, let’s be honest, most of them have been at lower multiples and lower valuation. They’ve been opportunistic purchases in the main and the dynamics in the market are such that there is not a huge buyer pool for retail and consumer businesses at the moment.”

Robert Baxter, a KPMG partner who leads the firm’s consumer corporate finance practice in the UK and internationally, describes a sector that has “been hit with a lot of headwinds over the past few years”. He says supply chain costs increased after the market turbulence caused by COVID, followed by the cost impacts and disruption caused by the war in Ukraine, and more recently minimum wage and employer NIC increases, to which retail businesses are especially vulnerable. “If you have physical stores, there are fixed rental payments that need to come out no matter how your revenue is going.”

But it’s not all bad news, he says: “There’s been a lot of entrepreneurship and great businesses that have been disrupting traditional sectors. This is the joy of the consumer sector – there is constant entrepreneurship and disruption. You have digitally enabled brands and businesses that have been disrupting more traditional players, often reacting faster to consumer trends and providing a lower-cost, more convenient way of reaching consumers. Certain impacts of the pandemic on consumer behaviour still remain, including a heightened awareness of wellbeing and a greater willingness to discover new brands. This is where social media has provided a great platform to educate and facilitate consumers’ discovery of these brands.”

Fashion victims

The struggle is apparent even for luxury brands, which had been largely immune to much of the earlier turbulence. A long-running deal for Prada to acquire Versace from Capri Holdings was first pegged at $3bn, but recently closed at €1.25bn ($1.42bn). “Those winds that push the luxury sector forward aren’t as strong as they were,” says Baxter.

The ‘general’ market for fashion has been so volatile that traditional private equity holders of consumer businesses have typically had one or two bad experiences in their portfolio. So they’re not in a position to deploy significantly more money into consumer while they are busy dealing with issues.

“In the pandemic there was a slight bubble mentality,” Baxter says, “with a lot of money flowing into businesses of varying quality just because they were digital.” But more brightly, he now sees “a new cohort of good online businesses emerging with profit and revenue growth”.

At least one growth area, says Windsor, is the segment between high street and luxury: “This is growing partially because people are a little bit more value conscious, but the relative prices between ‘affordable luxury’ and ‘luxury’ have just massively increased and there are lots of hot brands in the space that are creating a lot of momentum. What we’re seeing now is investors who still want to understand differentiation, but they want to understand defensibility, because fashion basically serves a promiscuous customer. And they want to understand resilience to any headwinds coming down the pipe. It could be Trump. It could be anything.”

That ‘anything’ includes the prospect of tariffs and trade wars that would impact already fraught supply chains and design processes. In this case Hopkinson envisions situations where “you could move your sourcing from China to another Asian territory but actually, in six months’ time, that might also be covered by some sort of tariff, in which case all you’ve done is lose some of your expertise. You’ve probably just put huge cost and complication into your supply chain; how do you ultimately pass on any of these additional costs to the consumer when your consumer is already feeling the pinch? It’s difficult,” he says.

Gemma Legg, an RSM M&A partner specialising in consumer retail, sees tariffs as an unknown that is “making people stop and pause, with many pivoting their international growth strategy away from the US. Many realise this isn’t viable in the long term, but unfortunately it’s another blow to retailers who are still grappling with the impact of national insurance changes and what that means for prices and the impact on their staff base” for a sector whose employees are typically on lower wage.

‘Vibecession’ – the disconnect between an economy and the public perception of the economy – brings difficulty but also opportunity (or necessity) to adapt and innovate, says Windsor. Dealing in fashion will always have trends, both for individuals and for investors. In this landscape, deals will often arrive through bolting on tech and logistics capabilities and thinking of new ways to make and market the hot brands.

Hopkinson adds: “Seeing all these retailers interested in AI and technology and how they can evolve their own businesses … that will start driving M&A, as well as some vertical integration and owning your supply chain. But, fundamentally, it has been challenging over the past few years, and I don’t think my job’s going to get any easier in the next six months. We’ll still be battling to get deals done.”