PE Firms Shy Away From Struggling Retail Industry

When private equity firms invest in retail, the results have been mixed at best.

The latest example came this week, when luxury clothing retailer Neiman Marcus opted to forego a sale to Canadian retailer Hudson’s Bay Company (TSX: HBC) after discussions reportedly broke down earlier this week, as first reported by The Wall Street Journal. The biggest impediment appears to be the Neiman Marcus’s massive debt load—it stands at $4.8 billion, per Reuters—that’s mounted since Ares Management and Canadian public pension fund CPPIB acquired it from TPG and Warburg Pincus in a 2013 deal worth $6 billion.

Earlier this week, the Dallas-based company announced its fourth consecutive quarterly loss, with sales at established stores down almost 5%, an improvement over the 7.3% decline from the previous quarter.

PE investment in the retail industry is dropping

Are PE shops ready to stop investing in retails companies? Investors have made just 86 deals in the global retail sector so far in 2017, compared to more than 300 apiece in 2015 and 2016, per the PitchBook Platform. At the current pace, this year would record the lowest deal count in the sector since at least 2013.

Here’s a closer look at PE investment in retail companies:

PE firms retail industry

Retailers face difficult choice

Neiman Marcus is by no means the only brick-and-mortar retailer struggling to compete with the rise of online shopping. Nordstrom (NYSE: JWN), a high-end department store chain headquartered in Seattle, announced last week it would explore a buyout that the owners hope would value the company between $1 billion and $2 billion. The Nordstrom family owns more than 30% of shares, and have expressed interest in keeping some form of equity post-sale.

Such a move hasn’t worked out for other retailers. Bain Capital-backed Gymboree filed for bankruptcy Tuesday in hopes of reducing the children clothing retailer’s debt load by $900 million.

Things aren’t going much better J. Crew, with Mickey Drexler recently stepping down as CEO as the company and its owners, TPG and Leonard Green & Partners, try to overcome $2 billion in debt. Those investors had hoped to one day take the clothing retailer public when the business improved, but such gains never came. The list of bankrupt retailers with PE owners goes on: Payless, rue21 and RadioShack, among others.

PitchBook Platform users can access all of our data on PE investments in the retail here.

Article by Adam Lewis, PitchBook