Trophy investments: Land and sea

Luxury investments have become a serious investment theme in the wake of the financial crisis. A two-track consumer market has set in to the investor mind-set, in which one side seeks value-for-money goods while the other splurges increasing amounts on brand names and high-end services. Furthermore, the booming middle class in developing markets, especially in Asia, has thrown a lifeline to luxury companies struggling with subdued consumer appetite in Europe.

According to Bain & Company, worldwide revenues from luxury goods markets are forecast to grow as much as 50% faster than global GDP. It is expected to grow globally by 4-5% in 2013 and 5-6% throughout 2015. That will mean in less than two years' time the global luxury goods market will have racked up more than €250bn in sales.

In this Tropy Investments mini-series we will look at buyout investments in various pockets across the luxury sector to analyse just how serious these investments are or if any have simply been ways of showing off.

Yachts
Surely the epitome of trophy investing, private equity investments in yacht makers have more often than not been thrown overboard.

Candover's 2006 purchase of Ferretti from Permira for €1.7bn has not only served as a cautionary tale to keep buyout houses at bay from this tempting sector, it also exemplified the excesses of over-leveraging in the boom years. Weighed down by more than €1bn in debt, in early-2009 Rothschild was brought in to advise on restructuring the company's liabilities. However, rather than injecting €100m of fresh equity Candover (now Arle) wrote off its entire investment.

Despite falling into the hands of its lenders, Ferretti has stayed afloat and last year was sold to state-owned parent of Chinese bulldozer-maker Shandong Heavy Industry Group – Weichai Group – for €178m.

Bain Capital's €1bn acquisition of Bavaria Yachtbau in 2007 echoed the misfortunes suffered by Candover and Ferretti. Again, a huge debt pile, this time of €800m, saw Bain ceding control of the company to its lenders. Its original creditor Commerzbank offloaded its holding in the company for around €300m. Anchorage and Oaktree collectively gathered up 95% of Bavaria's then €960m debt package as well as the bulk of Bain's stake. By 2009 Bain suffered a €400m loss on its investment and handed over control to its new distressed debt investors.

Considering the timing of the Ferretti and Bavaria deals it is not hugely surprising that these companies made their way into the hands of their lenders. However, post-crisis, activity in this market has been wrapped in a fog of caution and noticeably lacking in debt. For example, Better Capital's purchase of luxury boat and yacht-maker Fairline Boats in 2011 saw the turnaround house picking up a majority stake for €16.6m through a recapitalisation deal. 3i bought Fairline in 2005 for £40m, with RBS supplying a £29m debt package. The downturn caused 3i to write down its investment to zero. The sale to Better did little to help 3i recover its losses. But, lessons have clearly been learnt and this time round the company was bought without any leverage.

Automotive
The automotive industry appears to be a likely target for luxury investments, but private equity players have held the market at arm's length due to its volatility. However, a few have taken the plunge and proved that a risky investment in the luxury segment can sometimes fare well.

Investindustrial can boast turning Ducati into one of the world's leading motorcycle manufacturers with an 11% share of the global sports motorcycle market. The Italian GP acquired Ducati in February 2008 for €72m alongside co-investors. When it sold the company four years later, turnover had increased from €305m in the year Investindustrial invested to €480m in 2011, as well as an EBITDA rise to €94m in 2011 from €27m in 2006. The GP reaped an impressive 3x return on the €900m exit to Audi, proving that some trophy purchases can yield worthwhile returns.

Investindustrial has continued its theme of investing in the luxury automotive industry, having acquired a 37.5% stake in Aston Martin for €190m last December. The British business's other owner, The Investment Dar, has unusually used its stake in the business as leverage in a major refinancing overhaul for the Kuwaiti investment firm.

Despite this, Investindustrial's previous success in the sector elicits high hopes that the firm is a more-than-suitable investor for the business, which was threatened with a downgrade in credit rating by Moody's just weeks before the Italian GP invested. Aston Martin's revenues and unit sales both fell, by 19% and 19.5% respectively, in the first nine months of 2012.

Not all investments in this sector are as clear-cut as Investindustrial's success with Ducati, however. The infamous Formula One scandal, which is still on-going, has thrust the company's private equity backer CVC into the spotlight.

CVC acquired The Formula One Group (F1) in 2006 via its Alpha Prema vehicle, for somewhere in the region of $1.7bn. Only later did it come to light that this price may have been wildly above an appropriate figure.

In a transaction seemingly fraught with corruption, F1 CEO Bernie Ecclestone has been accused of bribing Gerhard Gribkowsky, the former chief risk officer at German bank BayernLB, to prevent a current valuation of F1 being carried out prior to CVC's purchase of BayernLB's 48% stake in the business.

Last year, Gribkowsky was found guilty in Germany of tax evasion and bribery charges, and was handed an eight-year and six-month sentence. Gribkowsky had admitted to taking bribes amounting to $44m from Ecclestone during the sale of F1 to CVC.

Since then, CVC has partially sold its stake in the business, cutting its shareholding in F1 down from 63.4% to approximately 40% in May last year. CVC sold the $1.6bn stake to Blackrock, Waddell & Reed and Norges Bank Investment Management, according to unquote". The firm had planned to list the business on the Singapore Stock Exchange shortly after the partial exit, but a volatile market prevented it from doing so and F1 still remains in CVC's portfolio.

The drama is still unfolding in this case, with Ecclestone recently being charged in Germany with bribery and breach of trust, according to reports. Ecclestone denies the charges.

Rather than a successful trophy investment, CVC's buyout of F1 appears to have turned out to be little more than a headache.

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• Topics
• Consumer
• Top story
• Arle Capital Partners
• Bain Capital
• Better Capital LLP
• 3i
• Investindustrial
• CVC Capital Partners
• Permira