Private equity: is it for you? UPDATED

Australian mid-size retailers with fully integrated service models are emerging as attractive investment opportunities for private equity firms. So could private equity be the right partnership for you? Private equity is becoming the perfect partnership for mid-size retailers looking for strategic support, and access to capital to execute growth plans.

The Grant Thornton Retail Dealtracker Report, Checkout: Shopping for Growth reveals Australia ranked seventh globally in terms of deal volume. This is a significant feat given the comparative size of our economy, and it is an indication of the level of mergers and acquisition activity in the local retail sector.

Private equity firms were the buyers in several of the largest transactions during the tracked period. Following these transactions, private equity firms were generally reported to have funded the growth plans of a number of Australian businesses through contributing additional equity through private placements.

Peter Thornely, retail industry partner at Grant Thornton Australia, says despite continuing retail pressure, businesses with customer relationships as a point of difference are emerging as the best growth opportunities for private equity investors.

“We’re seeing growth in niche areas like the pet industry. Big box pet stores have become the relationship point for pet owners, offering everything from puppy training to high end veterinary care to meet customer needs,” he says.

Other examples of niche businesses are:

  • Health and nutrition
  • Restaurant chains
  • Luxury goods

Shopping centres are transforming to ensure they remain relevant and this means incorporating entertainment and high end dining to attract a volume of customers, a clear trend that retail success is centred on fully integrated customer service models.

Mid-size businesses partnering with private equity firms are shown to be accelerating growth plans.

“Businesses are thriving post investment from private equity firms. We’ve seen the likes of Lorna Jane post investment by Champ Ventures Private Equity continue to enjoy strong growth, accessing overseas markets and using social media to engage with followers,” says Thornely.

Buyers within the local market have been seeking businesses with strong brands and omni-channel strategies.

“It’s imperative for mid-size retailers to build omni-channel strategies in an attempt to attract customers and service all their needs whether they are in store or online. This trend is driving M&A activity within the sector as retailers look to secure their e-commerce channels by acquiring online businesses. We’re also seeing high multiples paid for these online businesses, most notably those of a reasonable size in a specialist niche,” explains Thornely.

The report further revealed a high level of international interest in acquiring retail businesses in Australia, with international buyers accounting for at least 25 percent of the Australian retail business deals.

“Overseas buyers are interested in Australian retail businesses because of our stable regulatory environment, our strong positioning in the Asia Pacific region and the strength of our currency. We’ve seen how Zara has benefited from this, noting that some of its most profitable operations are reportedly in Australia,” says Thornely.

Investing in Australia

Private equity investments in the franchise sector include two US based firms honing in on the global potential of juice – first the Riverside Company partnering with the Boost Juice parent group, Retail Zoo, before selling its 70 percent stake to another private equity firm, Bain Capital.

At the time of Riverside’s investment, Boost Juice founder Janine Alliss described Riverside as an ideal investor, bringing a strong franchise background through its stake in other franchised businesses including the Dwyer Group in the US, a multi-franchise business similar to the Jim’s Group.

According to the report the new majority owner, Bain Capital, has investment in a Japanese restaurant chain operating about 3,500 outlets across 48 brand names and has backed global big name fast food brands such as Domino’s Pizza, Burger King and Dunkin’ Brands.

It has also invested in accounting software group MYOB.

Craig Boyce, a managing director at Bain Capital, says “Retail Zoo is highly aligned with our Australian investment strategy – leveraging our global QSR experience and a platform for international expansion. It participates in attractive QSR categories with leading market positions, very strong brands, solid customer relationships and numerous opportunities for further growth. We plan to work with the founders and management to build on their superb record of achievement.”

So what will Bain add to the Retail Zoo operation? According to Boyce, the investment will allow for further product innovation and expansion.

“We see an exciting opportunity to build on Boost’s strength as the leader in the Australian food and beverage market, with further health-oriented product innovation and site expansion beyond the traditional mall locations into universities, train stations, airports and petrol stations,” he says.

The top 10 Australian deals include Archer Capital’s investment in Quick Service Restaurant Holdings, parent company of Red Rooster, Oporto and Chicken Treat. Archer bought the business from Quadrant Private Equity which had grown the chicken chains from 460 to 620 stores in four years. Quadrant went on to acquire pet supplies chain City Farmers Retail, based in Perth.

Home deals

The Australian based Archer Capital looks to an active partnership with management, acquiring companies in equity partnership. One of its two funds, the Archer Capital Growth Fund, targets firms with an enterprise value of between $20m to $100m. It has seen the light in laser, recently signing up to a partnership with franchise chain Laser Clinics Australia which operates more than 40 clinics around Australia.

LCA’s business model has made cosmetic treatments such as Botox injections convenient and affordable for consumers. Founder Alistair Champion says the business is underpinned by three key pillars of success:

  1. an industry leading approach to product innovation and clinical safety
  2. providing an unrivalled customer experience and
  3. a pricing strategy that guarantees consumers the best possible value for money.

Archer Growth will be providing strategic advice, financial support and operational guidance.

Champion says Archer Growth was believed to be the right partner for the chain of clinics because of its proven track record of helping Australian businesses drive strategic and successful growth. “It has come at the perfect time as we are primed for expansion operationally and trading conditions are favourable, with the service industry doing well despite the relatively subdued retail environment.

“The partnership will specifically allow for further investment in training and development, ensuring LCA therapists, nurses and doctors remain the most experienced and qualified in the industry, a point of difference that will continue to give the business a key competitive advantage,” he says.

LCA is positioned to grow its clinic network to more than 70 clinics in 2015 and has expanded from NSW into ACT, QLD, VIC and SA, with the first WA store to open early next year.

Champion believes that partnering with like-minded franchisees is crucial to its ongoing success. “The business model has demonstrated it can deliver tangible returns to its franchisee partners,” he says.

For any franchisor considering a private equity investment,  Champion has some advice: “The business model needs to be successful, well thought out and developed”.