Private Equity in Fashion – Good or Bad for Business?

8/30/2017

There is a brutality when a PE firm enters a troubled fashion business with unrealistic expectations for change, innovation, and adaptive behaviors to suddenly transform a (usually) failing organization into a successful one. The fundamental problem is that the timing for a meaningful turn-around is never as tight as a PE firm would prefer because issues such as excessive development cycles, weak leadership, lackluster technology, ineffective processes and/or uninspiring product must be overcome to make progress. In a short amount of time, what do you choose to prioritize?

Risk, product innovation, modernization, brand identity, and efficiency are seriously lacking in many organizations, a combination of which is likely a contributing factor to their (near) demise. These very factors take time to germinate within an organization to overcome entrenched culture. Most importantly, they require strong, forward-thinking leadership.

The PE timetable doesn’t generally allow the luxury of cultivating successful practices. Perhaps because sometimes they start behind the eight ball. Evaluating a business solely from a balance sheet misses the mark on several valuable elements that could propel a company forward more quickly. We typically see the following issues arise when PE firms get involved in a distressed fashion business:

The technology that might come along with a distressed property could mean hundreds of thousands of dollars saved when trying to outfit a new team with appropriate tools to do their job. How many lost licenses or lost hardware falls through the cracks because PE firms don’t conduct proper due diligence of technological assets? How much legacy information is lost for the same reason? Recreating information can take months or years that PE firms don’t usually factor into their timetable.
Earmarking the correct amount of money for technology investment is mission-critical in today’s business climate. Running a lean business is even more dependent on modern technology; but without the money dedicated to it, it gets deprioritized.
Relying on poorly executed Transfer Service Agreements can be destructive. When companies are fighting internally over tech or operational support, they are not focused on the competition or the endgame.
Digital assets, the lifeblood creative companies, are often lost because number crunchers either don’t understand or don’t care about the importance of things such as: creative archives, print and pattern libraries, graphic assets, etc.
Physical archives such as print media, block patterns, proprietary color swatches, raw material and product sample are often lost in transition because no one is assigned to collect and protect them.
Without heritage information maintained, creating a strategy for turnaround and growth can be difficult. If the strategy is haphazard or blurry, how can it influence operational aspects such as hiring.
More often than not, PE firms seem to disregard the tactical aspects of running a business. Hiring people, training, creating processes and managing workload with a small team takes time and incredible effort. The lack of technology further exacerbates the time crunch to ROI PR firms are fond of.
Skills sets in-house are often overlooked as core assets that can assist in a smoother transition to new leadership. The “workers” keep things moving…and often know where the bodies are buried! Shedding resources too early, before proper vetting and/or before meaningful knowledge transfer is often quite detrimental to transition activities. Seeing incredible knowledge walk out the door should be painful to watch.
Leadership, whether transitioned or newly appointed, must have strong skills, an appreciation for technology and, most importantly, be open-minded. Executives must be willing to admit their strengths and weaknesses so their team can be improved with appropriate resources and partners.

Examples of the above cause many more issues than they should in today’s marketplace. Whilst it is true fashion companies need operating capital, perhaps it’s time for a new model that emphasizes brand longevity over quick profit.

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Private Equity in Fashion – Good or Bad for Business?

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Nancy Johnson

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