Private equity looks to private sales clubs

The shopping clubs, which secure bargains for consumers by selling out-of-season garments or buying items in bulk, entice new members with discounts of up to 70% on designer clothes. The business model was started by Vente-Privee.com, a French company which runs timed events during which shoppers could buy wares at cut-price rates.

Private sales websites have been popular among consumers, particularly in Spain, France, Italy and Germany. The trend in these countries may be attributed to their lack of the designer discount outlets that are so prevalent in the UK. Nothing more complex than a local partiality for high fashion may also be a factor, given that Datamonitor revealed an €8.1bn designer brand expenditure in Germany for 2009, compared to a meager €3bn spent in the UK over the same period.

In September, Gimv led a €9m funding round for Paris-based e-commerce company Private Outlet. During the same month, Accel Partners paid €37m for a significant minority share in the strikingly similar French site Showroomprive.com, having led a $20m round for Russian company KupiVIP back in April. On the exit front, 360˚ Capital Partners and Balderton Capital took the decision to float Italian retailer Yoox in December 2009, a move which has seen share prices jump from €4.30 per unit to their current price of €7.85.

Only last week, private retail club Privalia received a €70m investment from General Atlantic, Index Ventures and Highland Capital Partners. The Barcelona-based business, which boasts a following of five million members worldwide, will use the cash to fund expansion into Latin America. It recently launched in Mexico and predicts a sales growth rate of 800% per year in Brazil. The firm says much of the funding will be spent on mergers and acquisitions, which has sparked intrigue as to which of its many competitors may be targeted in the coming months.

One contender, which has since been exited, was BuyVIP.com, which was sold by a consortium of investors to Amazon.com. Managing partner Tom Anthofer led the exit on behalf of Cipio Partners, which was the company's largest shareholder. He believes that the amount of competition in the market is likely to drive many similar companies out of business.

"Clearly, the stakes have gone up and anybody who doesn't have ambition to play a big-sized game might want to bow out. There is now so much money sloshing around in this segment and with a gorilla like Amazon muscling its way onto the stage, I would expect accelerated consolidation and that eventually some new owners will be disappointed," he said.

General Atlantic is another private equity group to show interest in the segment, having preceded its boost for Privalia with a $75m cash injection into US-based private sales site Gilt. Anthofer thinks that multiple investments make little sense unless there is some way of differentiating the businesses from one another. "GA is swinging for fences," he commented, adding weight to the theory that Privalia's M&A strategy could be the healthiest option for a number of businesses.

Given the sums of money piling into the segment, consolidation does appear to be the most plausible outcome for many companies already targeting the same markets with very similar products. It remains to be seen whether this realisation on the part of investors will lead to an increase in secondary buy-outs in the sector over the coming year.

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