Piper cashes in on retail sector expertise

Recent media coverage has revealed a UK high-street and retail sector that is suffering, with a large number of well known brands facing financial difficulties or administration. Some recent examples include TJ Hughes, backed by Endless, Jane Norman, Thorntons and Habitat. With these stories, it is understandable that investors may be hesitant to pursue opportunities in this challenging market.

Investments in the UK retail space have fallen in recent years, according to unquote" data. As with general activity levels, buyout activity in this sector has slowed and has, for the last three years, hovered around 10 deals a year. Current figures for the first half of 2011 suggest that this will continue and pales in comparison to a peak of 23 UK retail buyouts recorded in 2007. Average transaction value has also fallen significantly from £822m in 2007 to £196m in 2010, suggesting a more cautious approach. Also worth noting is that an increasing proportion of these deals tend to be turnaround investments.

Piper's recent fund closure contradicts this sentiment, however. The consumer brand-focused GP closed its fifth fund on £107m, which is significantly larger than its £60m predecessor and above its £80m target. Investors would have been lured by several strong exits, the latest of which was the sale of adult soft drinks maker Bottlegreen that saw Piper reap 5x on its 2007 investment after an unsolicited approach by the buyer. Investor appetite was highlighted by the speed at which Piper's latest vehicle was raised; holding a first close at £90m just two months after it was launched in November 2010. This begs the question - what should investors look for when contemplating investments in this sector?

"Consumer spend is under pressure at the moment due to an increase in unemployment and VAT. As a result there have been changes in consumer tastes as well as a shift in perceptions of value. Therefore we see the best investment opportunities in companies that offer something different for consumers," says Peter Kemp-Welch, a partner at Piper. He also believes that UK businesses need to embrace international opportunities: "Companies need to balance off the headwind in the UK with opportunities abroad."

The fact that the high street is facing the most difficult time in the consumer space is reflected in Piper's strategy. "Store-based retailers face higher costs such as upward-only rents for stores," says Kemp-Welch adding that direct and online retailers often have more attractive business models, with more flexibility, knowledge of customer behaviour and are easier to scale internationally.

As the economic uncertainty continues, it is likely that consumer spend will remain tough. Muted deal flow and inflated prices for good businesses adds to the challenges facing prospective investors. However, the recent closing of Piper's fifth fund suggests that confidence is still there and that good opportunities can be found if you are prepared to shop around.

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