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Deal Mechanic: Sole trader

In the first of our new regular series on operational value creation, Private Equity International takes an in-depth look at Graphite Capital’s success with shoe retailer Kurt Geiger. By James Taylor

As retail investments go, buying a high-end shoe business for £95 million in February 2008 – just before the onset of the deepest recession in living memory – was definitely at the riskier end. Yet in the subsequent three years, Graphite Capital, a UK mid-market manager with a good track record in retail, managed to boost revenues at Kurt Geiger by over 70 percent to £205 million and create 600 new jobs – before selling the business to US firm The Jones Group for £215 million. This would count as a good deal in any circumstances. But to pull it off in the middle of a precipitous fall in consumer spending makes it all the more impressive.

So how did Kurt Geiger succeed where so many other retail businesses failed? It’s true that many luxury goods firms have (perhaps counter-intuitively) fared pretty well in the downturn. And it’s also true that many members of the fairer sex appear to have an insatiable appetite for new shoes, recession or otherwise. But its private equity owners can take some of the plaudits, too…


Kurt Geiger had spent the previous three and a half years under the aegis of Barclays Private Equity, which had backed a £46 million management buyout of the business from department store Harrods in July 2005. It proved to be a pretty lucrative investment, too: Barclays PE doubled its initial investment with the sale to Graphite. At the time, that looked like a pretty good deal. With a recession clearly in the offing, Kurt Geiger looked very exposed to the likely downturn in UK consumer spending – and having been through one period of private equity ownership already, there was presumably a chance that the lowest hanging fruit had already been picked.

Graphite had other ideas, however. “We assess a business by the management team’s vision: how well prepared they are for the economic circumstances,” explains Andy Gray, a senior partner at Graphite who co-led the deal. “In this case, they had a very strong plan, with lots of potential avenues for growth. It was clear that if one of these avenues was less fruitful, it could be offset by opportunities in other avenues – and this gave us the confidence that even in February ‘08, we could still do a deal like this.”

Nonetheless, Graphite did structure the deal conservatively: it made sure debt was kept to a relatively low level (about 40 percent of the transaction value) and that the attached covenants were suitably generous, in case trading went really pear-shaped. “It was obvious that businesses with a lot of leverage were going to suffer. When things are volatile, especially in a sector like retail where you have a lot of fixed costs, you have to make sure the debt doesn’t sink you.”

Gray rejects the idea that it’s harder to generate outperformance from secondary deals. “It’s a double-edged sword. With a primary deal, you’re in earlier but you have more to do; so there can be more potential on the upside, but you have to work really hard to get it and it all takes a bit longer to do. With a secondary, some of that work has been done, so there’s a bit less risk there and you feel like you have to give away a little bit on price as a result. But it’s not an exact science; some of our best deals have been secondaries.”

So was he confident at the time that they’d bagged a bargain? “You’re never confident – you always think you’ve paid too much! But it was a price we were comfortable paying because we felt there were good opportunities for us to exploit in the next few years and the business was led by a great senior management team.”


The management team was arguably Graphite’s biggest advantage on this deal: in CEO Neil Clifford, buying and creative director Rebecca Farrar-Hockley and FD Dale Christilaw, Kurt Geiger already had a well-established and close-knit senior leadership group (it helped, too, that its non-executive chairman Neil McCausland also chaired Graphite portfolio company sk:n, giving Graphite a natural way in).

“The top three people were very good so that didn’t change at all,” says Gray. “We meet dozens of management teams, and they were certainly one of the better ones – very complete and very professional, with an excellent underlying knowledge of the business and a strong feel for all the different opportunities they had.” Graphite’s key role, then, was to help them prioritise those opportunities – and to strengthen the second tier of management as the company grew.

Importantly, management were also used to working with private equity owners. What this meant, according to Graphite’s Markus Golser (the other senior partner on the deal) was that their reporting was very good, and they were always open to new ideas. For instance, one of Graphite’s first moves was to commission an external brand review. Rather than feeling threatened, management embraced the idea, co-commissioning the report and ultimately making some substantial changes as a result of its findings (including the decommissioning of one of Kurt Geiger’s brands, Solea). 

The same was true of cost control, another early Graphite focus. “What we always do is look at the cost structure and see if there’s anything to be gained there,” says Golser. “We tend to be very active in that area and it tends to bear fruit, because most businesses have a bit of slack – particularly if they’re growing very strongly, as that creates inefficiencies.” So Graphite brought in a purchasing consultant, who worked with management to reduce overheads, particularly in the company’s supply chain and logistics.


Perhaps the key strategic change instituted by Graphite was the expansion of Kurt Geiger’s distribution channels.

This was partly about consolidating the existing business. At the time of the Graphite buyout, the biggest chunk of the company’s revenue actually came from running the shoe departments of some of the UK’s largest department stores, including Harrods and Selfridges. The latter, which was on a mission to build the world’s biggest luxury shoe department, was already in discussions with Kurt Geiger about expanding that relationship; so Graphite’s first task was to help conclude a long and complex negotiation over the terms of the deal (how much space Kurt Geiger would have within the department, who would be responsible for what, how the revenue should be split, and so on). 

It did so successfully, and was also able to roll out a similar offering into other department stores like Debenhams and Fenwick (helped by the collapse of Shoe Studio, a big competitor in this space – one definite upside of the difficult operating environment).

But Kurt Geiger’s own-brand store network also grew substantially under Graphite’s ownership. In the UK, it rolled out an extra 24 stores in various airports, shopping centres and high streets. Retail landlords were falling over themselves to win the company’s business. “We opened a dozen stores in a year because we basically got into them for free,” admits Gray. “In some places landlords proactively wanted us in as anchor tenants, so we were able to do some very good deals – long rent-free periods, and kit-out costs paid in full by the landlord”.

Expansion was also rapid overseas. Kurt Geiger had already started negotiating with Landmark International about a franchise deal to open stores in the Middle East; later on in the investment, Graphite signed similar deals with partners in Russia and Turkey. All told, the international business was producing revenues of more than £15 million by the time the business was sold, compared with very little when Graphite took control. But the real significance went beyond that boost to the top line: it proved the Kurt Geiger brand would sell overseas, which ultimately made the business much more attractive to an international trade buyer like Jones. 

Another important development was the re-launch of the Kurt Geiger website, which gave the company a genuine online retail platform for the first time (it did have a site before, but without all the bells and whistles we’ve come to expect of good e-commerce operations).

Achieving and managing this expansion required lots of new staff. For instance, the company invested heavily in its in-house design function as it sought to develop new brands and products to differentiate these new offerings without cannibalising sales elsewhere. All told, headcount almost doubled during Graphite’s period of ownership. 

It also required lots of homework, as Graphite worked with management to evaluate potential opportunities. Here, Graphite clearly benefited from its previous experience in the retail sector. For instance, it walked away from one potential franchise deal in Turkey because it was worried about the potential reputational damage of expanding too far, too fast, within that market; having had a bad experience with a franchise partner in Australia during its ownership of Japanese restaurant chain Wagamama, it had learned this lesson the hard way. “One of the main issues for a business like this is planning growth,” says Gray. “You need to make sure it doesn’t try to do too many things at the same time.”


The other crucial factor, of course, was that Graphite found the right buyer at the right time. In early 2011, the firm received an approach from The Jones Group, a big US clothing company that had practically no presence in Europe. “We probably would have looked to sell in the following 12 months anyway, so we were beginning to discuss next steps with management,” says Golser. “We debated with them whether they should do another buyout, but we felt that given the market, and given the lack of debt funding for retail businesses, it would be very hard for private equity to match a trade price.”

And the strategic fit was obvious: Kurt Geiger gave Jones an immediate foothold in Europe, while Jones gave Kurt Geiger a strong platform to expand in the US. As a result, Graphite was able to get what was generally regarded as a pretty generous price – given this was still, after all, a high-end retailer operating in a global downturn.

So was it the firm’s best ever retail deal? “It was a good one for us,” Gray admits. “Not necessarily the best – but in the circumstances, we were really pleased. As the environment got worse, we were able to sell to the only party that would pay that price at that time – i.e. a party that wanted to do other things with the business.” 

Kurt Geiger is a business that’s been transformed in the last few years. Clearly the management team has to take a lot of the credit for that; but its private equity owners also deserve a lot of credit for some smart strategic moves. It would be hard to argue that Graphite’s investors don’t deserve the juicy return this deal generated…