A private equity firm on the King’s Road?

CHANGE CAPITAL PARTNERS’ Steve Petrow talks to Ben Harding about the challenging retail environment, illustrious partners and life on the King’s Road.

You can tell a lot about a company from its location, and new buyout house Change Capital Partners occupies one of the glitziest of them all.

As a retailer specialist, with big-name founders, it is fitting that the group is tucked away among boutiques of Chelsea’s King’s Road, a more usual haunt of toffee-nosed debutantes than hard-nosed investment bankers.

Eschewing the more traditional environs of St James’s, the City or Canary Wharf immediately suggests that this is a different kind of animal. Indeed, Change is one of few private equity firms to take the recent trend toward sector specialisation to its logical conclusion and focus solely on one industry.

On his morning stroll down from the Sloane Square end of the famous London shopping street, managing director Steve Petrow says he gets a good insight into the way the retail wind is blowing.

“ On the morning walk to work I pass 12 different shoe shops “ he says “ all of which sell a similar range. It is always interesting to look at where the queues are and try to work out why some are doing well while others are so obviously struggling. If you want to find out what is happening across the market, it is important to keep a close eye on what is going on in the High Street .”

This way of thinking pervades the conversation with Petrow. His background as a consultant  with Bain Consulting and founder of the eponymous private equity offshoot in Europe gives him a very top-down outlook. While not the acknowledged retailer in a group that includes the luminous talents of Luc Vandevelde and Roger Holmes, you sense that Petrow has become totally absorbed by the challenge of getting to grips with the sector.

As he puts it: “ I am teaching them about the private equity world, they are teaching about retail “ And he certainly seems to be learning the trade – if it weren’t for other engagements, you sense that Petrow could have talked about the group’s three current investments in Robert Dyas, Hillarys Blinds and H2O/Signal until well into the next day.

As the second of three managing partners to join the group, he was introduced to Vandevelde, the erstwhile chairman of M&S and giant of European retailing, through Frédéric Hufkens, a mutual friend in the private equity business. Over lunch, the two rapidly agreed that Petrow‘s expertise in assembling a European private equity team and Vandevelde’s vision for a dedicated single-sector firm were complementary.

“ I could see that Change had a lot of aspects that initially attracted me to Bain Capital, with the focus being on active ownership, and working very closely with management, “ Petrow says. “ After 12 years in London working with Bain, I was ready for a new challenge and the idea of working for a truly independent start-up was attractive.”

Despite entering a very hot private equity market for retail and consumer goods, Petrow feels that the focus and experience will give the firm an edge over competitors that have a more generalist view.

“Sure there are risks in focusing on a narrow field,” he says, “but retail and consumer goods make up a massive percentage of the market. Part of the reason why private equity firms are moving into the sector is because it offers high returns but is also very risky – when things go wrong, they tend to go wrong very quickly, which is why banks have traditionally been reluctant to lend.

“I think we will see some high profile failures in this sector in the medium term – when you have a strong tailwind in terms of consumer spending it is easy to be bullish and pay top prices, but we are already seeing some jitters and a greater polarisation between winners and losers.”

According to Petrow, the way to pull through a retail slowdown and profit when the tailwind is so not so gusty is to operate with greater focus.

“The whole private equity market is moving the way of greater focus because it is a tougher business in every sector, “ he says. “The only way to maintain returns is to have a more active style of management and more intimate sector knowledge. That is why generalists in this sector will pay top prices for the winners, and we will be able to look at the losers with a view to turning them round.”

The rationale behind focusing on the mid-market is that Change can make more of a change : “We are focusing on a part of the market, where a private equity firm can really make a big difference – in a really large firm it is difficult to manage change because there are so many people making decisions, for firms in the €50m-€250m range, where we operate, there are fewer decision makers.”

Aside from Vandevelde’s obvious status in European retailing , the decision to join the new venture was eased by the fact that funds had already been secured directly from the Halley family, a leading shareholder in the Carrefour group, where Vandevelde had cut his teeth. The family provided the €300m initial cornerstone investment and has set aside a further €700m for co-investment.

“In a very tough fundraising environment for the first-time funds the fact that we were already funded and could get on with the investment business was certainly a major attraction, “ says Petrow.

On the deal origination side, the presence of so much retail experience also has its advantages. “When you are talking to management teams it does have a lot of clout if you can say that you can pick up the phone and speak to a Roger Holmes or Luc Vandevelde, “ he says. “How many mid-size companies can call on this experience in other sectors?”

To-date, the firm has invested about €100m in three deals for a combined enterprise value of €300m. Its debut transaction was the €60m buyout of Robert Dyas in March 2004. The company operates a network of hardware and DIY shops across South-East England and is in a growing market niche with very little competition in the convenience store format.

Change has already recruited new senior management to push what it sees as an underexploited brand into new sites in its core geographical market.

In August, the company completed its second investment , acquiring UK blind manufacturer Hillarys Blinds in a transaction valued at £115m from mid-market firm Close Brothers Private Equity. The rationale behind this was to maximise the firm’s marketing spend and to push forward more cross-selling from its 800-strong sales force.

The third deal, and the first on the Continent, was the acquisition of the H20/Signal, a branded leisurewear and retail company that the company hopes to expand into new markets both through organic growth and new acquisitions.

While other firms look to hire best-of-breed operational partners to add value to their portfolio companies, Change is one of the few who have started with strong sector expertise and then bolted on Petrow’s private equity nous. It will be interesting to see if, in five years time, other teams take the model of sector specialisation to its logical conclusion. At least you get to work from Chelsea!