Irving Place chief: ‘Horrendous’ holiday season ahead

Trouble in the retail sector presents opportunity, with 'some of the greatest fortunes' due to be made by savvy investors over the next year, according to John Howard, CEO of Irving Place Capital, formerly Bear Stearns Merchant Banking.

Private equity firms that target the retail sector will see a “horrendous” holiday season this year, yet the current environment is perfect for investors to find undervalued companies in the sector, according to John Howard, chief executive of Irving Place Capital, formerly Bear Stearns Merchant Banking.

His own firm focuses on retail, as well as consumer products and financial services sector, and possesses roughly $1.7 billion in dry powder from the $2.7 billion fund it raised in 2006.

A US government report in October revealed that retail sales plunged in September by 1.2 percent, almost double the 0.7 percent that was expected.

“For the last few weeks, mall traffic has just stopped,” Howard said at a conference in New York.

Over the next year, some of the greatest fortunes will be made.

John Howard

Several private equity-backed retail companies collapsed into bankruptcy this year under the weight of heavy debt loads and falling sales. These include Sun Capital Partners-backed Mervyns, a department store chain; Apollo Global Management-backed Linens ‘n Things, a home goods retailer; and TA Associates-backed Steve & Barry’s, a discount clothing chain.

Retail is the primary sector targeted by the world’s largest private equity firms, according to report from PEI, The Largest Private Equity Firms in the World: Anatomising the Impact of the PEI 50. From 1 January 2003 to 15 April 2008, the PEI 50 invested $317 billion in 353 consumer and retail deals.  The five most active buyers in the sector were The Blackstone Group, Kohlberg Kravis Roberts, TPG, Apollo Global Management and Bain Capital.

This year, consumers will be “trading down”, meaning if they previously had been shopping for luxury goods they are likely to choose less expensive products, Howard said. This creates an opportunity for investors who can identify in which niche sectors exactly consumers are trading down, he said.

He stressed that “unbelievable” values exist in the retail sector right now, especially in the mid-market.

Irving Capital is looking to invest in retail companies based on traditional brick and mortar stores that do not have an online presence, and would potentially move the companies into e-commerce, he said.

“In this environment, some of the greatest opportunities exist,” Howard said. “Over the next year, some of the greatest fortunes will be made.”