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Private Equity: Hyperinflation and strong, suitable financial management
London, 4th October 2011
August 2011 has been widely recognised as the worst month for high-street sales in 2 years, particularly within the apparel and homewares segments. With the retail sector being one traditionally favoured by private equity, there are further concerns as to the performance of such investments in light of retreating profitability.
This is in large part driven by rising materials and logistics costs and poor FX rates. This is compounded by a Lewisian turning point on labour costs, where the supply of surplus labour tightens and the job market contracts and wages subsequently rise.
This has been most recently seen on coastal industrial China, where the cost of staff has risen to the extent that international businesses have relocated inshore, including Honda and Intel, or to Vietnam and other lesser-developed economies.
These global hyper-inflationary effects are clearly playing substantial roles in the sector, and with many UK retailers unable to increase prices for fear of an elastic demand, how can PE ensure their portfolio businesses grow to an ‘exitable’ level?
It occurs to us at Maven Partners that there has never before been such a need for highly-skilled Finance Directors within the consumer sectors. These teams need to boast strong supply chain strategy and management, whilst also looking to potentially upscale higher-margin online offerings and potentially downsize physical locations.
Therefore Finance Directors that have online experience and an ability to leverage disruptive business models (and where suitable, strong finance teams that understand transfer pricing and international revenue recognition) will become increasingly vital.
If you would like a conversation regarding expertise we would be delighted to help. Maven is very well networked with individuals across many sectors and has significant experience of dealing with such situations.
