The Genteel
April 21, 2021



At its most basic level, fashion is very much a consumer product and, at its most complex, it is capable of reaching the apex of artistic expression. Unlike many other art forms, business has played a prominent but relatively un-maligned role in the design process. The potential for fashion to harmoniously combine the entrepreneurial and the creative, without compromising either, sets it apart.

Over the past few years, however, the business side of fashion has taken on a life previously unknown. Common sense is being displaced by complex IPOs, massive holding companies, and private equity firms that dangle too-good-to-be-true deals in front of venerable fashion houses and young upstarts alike. Undoubtedly, an entrepreneurial spirit is essential to the success and longevity of a designer, and can even facilitate the creative process. Adequate financial support allows a designer to hone his or her craft without having to worry about food, shelter, and yes, clothing. Nevertheless, the influx of the finance mentality in fashion - brought most conspicuously through private equity investment and its one-size-fits-all approach - threatens the very creative integrity that allows the fashion business to thrive in the first place. Even if the rush to invest in fashion has subsided a bit from its height a few years ago, private equity's impact on the way the fashion game is played is only growing more entrenched and insidious.

Jimmy Choo campaign

While the private equity world as a whole shirked fashion for quite a while - validly citing the difficulty of expecting consistent growth and return-on-investment from a trend-based industry - Permira's risky acquisition of the Valentino Fashion Group in 2007, and later a large (though not majority) stake in Proenza Schouler, is widely considered to have turned that reticence around. Other companies like Apax and Texas Pacific Group quickly followed suit, and brands like Tommy Hilfiger, Jimmy Choo, Peter Som and Zac Posen became subordinates to the private equity machine. Ideas of scalability, consumer base, sustained growth, "product improvement" and the like immediately infiltrated the industry, which theretofore seemed to concentrate on business growth as a way of maintaining the creative viability of the house or designer, not an end in and of itself. Private equity groups demand tangible results and they demand them now from an industry that, ironically, gains currency on intangible feelings and vision. Market research can do little to assure a collection will be a hit from one season to the next. Fashion is about leading the pack, not responding to the pack's conservative tendencies and expectations. But, it also takes years to build that status and be able to sell it successfully. Private equity's use of debt to finance deals and its accompanying short-term timeline to recoup on a brand (typically three to five years) only highlights the ultimate incompatibility. Luxury fashion, in particular, is so tied to individuality, idiosyncrasy, and indulgence that predicting profitability in a consistent manner seems like a fool's errand.

As some deals have not worked out as hoped (for example, Permira has had to write down its investment in Valentino and repeatedly renegotiate its debt due to lackluster revenue growth), it has become increasingly clear that the union of fashion and private equity may not be a fruitful one for either the finance world or the fashion one. However short-lived the tryst may have been, it may have done more serious and lasting damage than a short-term buyout deal would have initially suggested.

The introduction of private equity into fashion has been a game changer. Financial accountability standards have been haphazardly applied to an industry whose lifeblood is independence and personal creativity when they are better suited for mass-produced wholly consumer products.

The introduction of private equity into fashion has been a game changer. Financial accountability standards have been haphazardly applied to an industry whose lifeblood is independence and personal creativity when they are better suited for mass-produced wholly consumer products. Buzz concepts such as market saturation and scalability have become accepted benchmarks of success in the fashion industry. Whether it be large fashion conglomerates like LVMH who speak ridiculously of extending retail to places like Lhasa, Tibet because "emerging markets…are on the forefront of growth," or whether it is younger brands talking about optimizing marketability first and foremost (for example, this Business of Fashion interview with Phillip Lim), fashion players are now consummate business(wo)men, including those responsible for the creative output. Again, while some business acumen is necessary for a designer to be truly successful, one wonders if too much of the design process has become influenced and distorted by "practical" (read: financial) sensibilities that are far removed from the practicalities imposed by the business of clothing itself. 

Even if the threat of direct private equity investment is not as strong as it was in 2007, the industry may not be out of the woods just yet. A potentially latent danger of the acceptance of this financially-oriented kind of thinking may be exhibiting itself in the recent surge of major brands going public. The notoriously independent Prada Group was listed on the Hong Kong Stock Exchange this year in order to raise investment capital. Michael Kors just announced that it will go public this December, with rumors that friend Vera Wang may follow. While the dangers of going public are by no means as pronounced as with private equity buyouts, a similar kind of financial growth-obsessed thinking remains. After all, stockholders are only happy when profits increase. Even less-than-expected growth can undermine the creative and financial stability of an otherwise flourishing brand.

Dries Van Noten

There are still beacons of light, however, both on a large and small scale. The grand and storied house of Hermès famously rebuffed LVMH's hostile attempts to acquire Hermès stocks, even restructuring under French Law so as to guarantee the Hermès family will never lose majority control. On the other end of the spectrum, designers like Dries Van Noten recently put it succinctly, if not also plainly, in a recent Wall Street Journal article: "I've always worried that if I sold the company I'd lose my liberty, my freedom… I'm very happy with the size of the company as it is right now…I don't have to grow." Even those who once participated in the private equity frenzy are expressing their regrets. Tamara Mellon, co-founder of Jimmy Choo, recently reflected on her decision to go the private equity route, telling the Financial Times, "In retrospect, I wish I had been my own private equity firm and just gone to the bank and asked them to lend me the money I needed." Of course, complete independence may be a luxury for the already wildly successful; but even so, a modified system that acknowledges the necessary "patron"-like status of any investor should reign. Francois Pinault, head of PPR, the massive French conglomerate that owns The Gucci Group among others, gives hope that some heads of business are willing to recognize this attribute: "It's not the philosophy of the group to be unchanging… We're there to accelerate the development of a sector, to give a strategy, to put people in place, and then to grow it over 10 to 15 years…We don't define the exit. It's not based on ratios but on the degree of maturity of the business."

And this is how fashion can be saved - when designers and industry professionals retreat from the gospel of the quarterly financials, and realize that long-term sustainability of a brand is the most important and reasonable financial goal to expect. And that at the heart of that sustainability is the creative integrity that comes with a fair share of inefficiency. Maximizing profits quarter after quarter is best left to mass manufacturers and the bank barons who create electronic spreadsheets out of thin air. For designers that create tangible items that provide both a basic need and a dream in one fell swoop, a slightly lower profit margin shouldn't even register.



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