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Recession-proof retail?

Recent deals and proprietary PEI research show the asset class continues to bet on pockets of the retail sector, despite gloomy consumer confidence, writes Suzanne Weinstock.

Deploying capital in the retail sector at a time of declining consumer spending may seem counterintuitive – but a lot of firms are betting on such contrarian moves.

According to a new research report out from PEI, The Largest Private Equity Firms in the World: Anatomising the Impact of the PEI 50, over the past five years consumer and retail deals drew by far the most capital invested by the PEI 50, PEI’s proprietary list of the world’s largest private equity firms.

From 1 January 2003 to 15 April 2008, the PEI 50 invested $317 billion in 353 consumer and retail deals. The Blackstone Group led the pack with deals valued at $63 billion over the past five years, according to Dealogic.

Today’s floundering credit markets and a widespread economic downturn have claimed numerous retail-tied portfolio companies including Sun Capital-backed US department store Mervyns, TA Associates-backed clothing retailer Steve & Barry’s and Capricorn Investors-backed cookie company Mrs. Fields Famous Brands. The three companies have all folded, filing for Chapter 11 bankruptcy protection.

But despite the headline-making collapses, private equity firms continue to bet on certain companies viewed as immune to the dismal retail trends.

Some have played the odds that the world’s wealthiest won’t stop spending. At the highest end of the luxury goods market, Middle Eastern private equity firm Abraaj Capital in August acquired a 50 percent stake in Numarine, a Turkish luxury-yacht manufacturer, for an undisclosed sum.

“The leisure and luxury marine market has demonstrated positive, long-term growth through economic cycles,” Mustafa Abdel-Wadood, a managing director at Abraaj Capital, said at the time.

The Carlyle Group, too, is expecting fat wallets to continue opening. Last month, the firm agreed to pay a reported €220 million for a 48 percent stake in Moncler Group, an Italian manufacturer of high-end sportswear brands.

Looking to target the other end of the income scale, Canadian private equity firm Genuity Capital Markets recently bought up 93 stores owned by insolvent Saan Stores as an add-on to majority-owned Bargain Shop Holdings. Bargain Stores positions itself as a neighbourhood alternative to superstore Wal-Mart.

The traditionally recession-resistant alcohol sector has also attracted private equity. Russian Alcohol Group was bought out for $600 million this summer by a consortium including the UK’s Lion Capital, Goldman Sachs, the private equity arm of UFG asset management and a rival vodka producer, Central European Distribution Corporation.

And its seems that regardless of any consumer penny pinching, parties are expected to persist.

“When somebody has their third birthday, you’re not going to wait for the recession to end to celebrate it,” Advent managing director Steven Collins said when the firm recently purchased a 38 percent stake in party supplies company Amscan Holdings.

As investors settle in for an extended period of economic decline, their retail investment may become more targeted but shows no sign of coming to a halt.