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When Should Fashion Companies Go Public?

Any fashion company that is contemplating going public needs to have not only the product and brand fundamentals right but also a business strategy that can easily be understood by the markets, writes Imran Amed.

Investment bankers, financial analysts and all those who could benefit from the confidence that such a transaction brings to the broader financial markets were paying close attention. Arm’s stock debut was considered a bellwether for an IPO market that has remained subdued this year as interest rate hikes and ongoing uncertainty about the global economy have persisted. The success of Arm’s public listing could mean many more companies dip their toes into the chilly IPO waters.

This growing market confidence may explain why several fashion and beauty companies are considering getting into the IPO game too. This week, Birkenstock, owned by LVMH’s private equity arm L Catterton, filed to go public on the New York Stock Exchange. And, market reports suggest that Puig — the Spanish beauty conglomerate that owns Carolina Herrera, Charlotte Tilbury and Paco Rabanne — and Amer Sports — owners of cult gorpcore brands Arc’teryx and Salomon — are also exploring potential IPOs.

According to Bloomberg, Birkenstock could be valued at more than $8 billion. In a letter accompanying the filing, which disclosed that the company’s annual sales have grown from €292 million in 2014 to €1.24 billion in 2022, CEO Oliver Reichert called the company “the oldest start-up company on earth,” alluding to its founding as a family-run firm.

But IPOs aren’t the right move for all fashion and beauty companies. Going public means being accountable to the same group of sometimes fickle players who are cheering the Arm IPO. Many of these financial analysts and investors don’t understand the fashion industry and the unique idiosyncrasies which make certain brands successful, and other brands not. Investors and portfolio managers overseeing billions of dollars in assets under management don’t have the industry knowledge to decode what is happening with a given company just because so much of what makes a fashion company successful (or not) can’t be explained by even the best financial modelling. Any fashion company that is contemplating going public needs to have not only the product and brand fundamentals right but also a business strategy and financial performance that can easily be understood by the markets.

Compare Lanvin and Zegna. This week Zegna reported a 45 percent increase in first half operating profit, continuing strong performance since the company went public via SPAC in December 2021. Zegna is benefiting from a wider “quiet luxury” boom as its product strategy shifted to softer tailoring and casual dressing even before the Covid lockdowns. But its success in the markets also comes down to a clarification of its business strategy and solid investor communications in terms which even the bro-iest of finance bros can understand.

On the other hand, Lanvin Group Holdings, which in addition to its namesake brand also includes Wolford, Sergio Rossi, St. John Knits and Caruso, went public on the NYSE in a de-SPAC merger in December 2022 but has yet to sufficiently clarify its plans for Lanvin which remains mired in a post-Alber Elbaz funk. The company remains unprofitable and sales at Lanvin are less than half of what they were under the charismatic creative director who left suddenly after a fallout with former owner Shaw-Lan Wang. As a result, anyone who invested in the stock at the end of last year has lost 55 percent of their initial investment.

Established by Jeanne Lanvin in 1889, Lanvin is one of the longest surviving French fashion houses with an incredible heritage. There is so much potential in this brand and the company’s new CEO Siddhartha Shukla is one of the smartest young executives working in the business. But he needs the time and space to drive a new creative and business strategy (the search is on for a new creative director). Trying to bring Lanvin back into the fashion conversation under the gaze of the ruthless financial markets is not an enviable task, as the pressure to perform financially continues relentlessly.

When the time comes, his bosses at China’s Fosun Group will also need a stronger approach to investor communications to convince the markets. I bet they now wish they had waited until the brand was back on its feet before being subjected to such scrutiny.

A trio of big brands are relying on this week’s runway shows to chart a new course. That, plus what else to watch for in the coming days.

It’s a cliche to say the stakes are high for a runway show, and rarely accurate. A brand can turn critical acclaim or a viral look into sales. But it’s rare for that buzz to last beyond fashion week. And in the age of mega brands and TikTok there are plenty of other ways to sell clothes and bags, even if the initial reception was negative. That said, there are three shows this week that could have a very real impact on some of the industry’s biggest businesses:

Gucci
For Gucci, the stakes are in fact really, really high. The brand’s post-pandemic struggles are well documented, and it has effectively been in a holding pattern awaiting the unveiling of Sabato De Sarno’s vision. The particulars have been kept under wraps, aside from a teaser image featuring the model Daria Werbowy and some speculation of more overt nods to Gucci’s heritage to reengage high-net-worth customers who grew tired of Alessandro Michele’s maximalism. Parent company Kering has overhauled its biggest brand’s executive ranks, and no doubt plans to move fast to capitalise on whatever comes down the runway in a few days. All that remains to be seen is whether consumers are on board with the new Gucci. The market doesn’t need a fully formed, instantly commercial concept in Milan on Thursday, but it’s essential that the collection gets people excited about Gucci again. This could be one of the rare runway shows that moves share prices.

Stake-o-Meter: 🥩🥩🥩🥩🥩

Tom Ford
For Peter Hawkings at Tom Ford, Milan Fashion Week’s other big debut, the stakes are more run-of-the-mill. Estee Lauder paid $2.8 billion for the brand, but is mainly interested in its popular fragrances and makeup. The success of ready-to-wear can help sell Black Orchid, but it’s not essential. The show matters more for Zegna, which has the license for Tom Ford’s entire fashion business (its role was previously limited to menswear). Zegna released earnings last week but said little about its ambitions for the brand, other than that it plans to talk strategy around Tom Ford at its annual meeting in December. How Hawkings’ first collection is received could shape the company’s plans.

Stake-o-Meter: 🥩🥩

Burberry
Daniel Lee stages his second runway for Burberry on Monday in London. His well-received first collection is hitting stores about now; in July, executives were upbeat, telling analysts that feedback, and orders, from wholesale accounts were meeting expectations. Big brands don’t need standout runways to stay top-of-mind with consumers. But Burberry is trying to raise its average price point, build up its leather goods business and generally prove it can compete in a market dominated by much bigger companies. A strong show on Monday will help with that.

Stake-o-Meter: 🥩🥩🥩

Logistics companies say the latest automation technology demands new investment to keep the machines on track and goods moving

The new robots, drones and other technology tools filling the country’s distribution centers are finding one thing all too difficult to reach: a fast and reliable internet connection.

Robots that wheel through warehouse aisles to find and pick goods need a high-speed link to keep them on the right track. Autonomous forklifts require a signal to direct them as they move pallets from loading docks to storage racks. Self-driving trucks must maintain a GPS tie to get them on the right path from a manufacturing plant to a warehouse.

As companies upgrade their operations with increasingly sophisticated machines, many are finding the internet connections they have in place fall short of the needs of new, high-powered automation technology. For some, that can mean expensive and time-consuming upgrades to get logistics sites up to speed, industry experts say.

Companies frequently have “already selected technology to go deploy before this ever comes up,” said Nick Leonard, senior vice president of product for Norfolk, Va.-based logistics software provider SVT Robotics. “Often sites are running essentially their phone infrastructure or just basic internet for email browsing.”

The roadblock to automating highlights one of the challenges companies face as they add more technology to their logistics operations, from automating container terminals to using artificial intelligence to track shipments. The rapidly developing automation technology can help speed up operations and lift some of the burden off human workers, but the tools have a new set of requirements such as access to far more electrical power and a strong internet signal.

Building that capability can be particularly difficult for industrial operators that are located in rural areas far from existing infrastructure, or those in urban areas where there are heavy demands on the power grid.

Leonard said that upgrading a warehouse’s internet can be as simple as calling the internet provider to increase the bandwidth or as complicated as installing fiber-optic cable lines, antennas and server rooms, depending on the type of automation being added and the existing connections.

“That can get very expensive, in the millions of dollars, to solve those challenges,” Leonard said.

Some operators are installing private networks that run on high-speed 5G wireless cellular technology, which can provide faster and more stable internet than traditional Wi-Fi networks, experts say. About 45% of transportation executives and 35% of manufacturing executives surveyed by research firm Gartner last year said they planned to invest in 5G in the next 24 months.

The technology could help logistics operators ensure they have a strong, secure internet connection that can keep their robots running even if bad weather knocks out power or the facility is targeted in a cyberattack. The 5G networks can also provide a steadier connection than Wi-Fi for large buildings and for autonomous vehicles, particularly in remote locations, experts say.

“If you start thinking of autonomous vehicles or robots in general, they require many different types of sensor and visual data to take decisions and to operate autonomously, so that data has to reach them in a reliable and timely manner,” said Harpreet Dhillon, a computer engineering professor at Virginia Tech.

But there is a long way to go before 5G is widely adopted in industrial settings, partly because not all the warehouse automation on the market is able to run off 5G. Robots built to work with Wi-Fi often have to be adapted to 5G.

Those updates can take time, said Mike Johnson, president of warehouse automation firm Locus Robotics. Wilmington, Mass.-based Locus has been working for a few years on making its robots compatible with the cellular technology.

“We have the bots at these sites run 24 hours a day,” Johnson said. “The system has to be super-resilient, super-robust.”

Experts said another barrier to adoption is that 5G networks aren’t as widely understood as Wi-Fi.

“You take these organizations that are not very IT-forward and then throw in something like private [cellular networks], it’s going to be D.O.A.,” said Samuel Reeves, chief executive of Philadelphia-based warehouse automation provider Fort Robotics. “It’s not the way people think about wireless networking right now.”

GE Appliances, a subsidiary of home appliances company Haier Smart Home, has upgraded its internet as it has added robots and tested autonomous shuttles at its manufacturing facilities and warehouses in Georgia, Kentucky and Tennessee.

Harry Chase, the company’s senior director for central materials, said there have been hiccups along the way.

As much as “we think we’re good to go on Wi-Fi, a lot of times we have to go in there and add extra antennas just because the signals become too weak for the robots to respond to,” Chase said. Without consistent internet, a robot will “start running and then all the sudden it stops, and you go, ‘OK, why did this stop?’” he said.

GE Appliances is rolling out self-driving shuttles by Swedish autonomous trucking startup Einride at facilities in Tennessee to transport items between the company’s buildings. The trucks, which run local routes that stretch a few miles, require a strong cellular connection to navigate the roads.

“We had to put Wi-Fi outside the building, we had to improve the 5G cell network, and we had to go in and hone in the GPS,” Chase said. “If the signal disappears for even a microsecond, the truck will actually come to an automatic stop, so these are the extra things you have to consider.”

Frédéric Arnault, the 28-year-old son of LVMH boss Bernard Arnault, is expected to leave his position as chief executive of the Swiss watchmaker TAG Heuer in the next few months, industry sources have said. The luxury family scion is to be replaced by Julien Tornare, who has been tasked with reviving TAG Heuer after having successfully revamped its sister brand Zenith over the past six years.

The move comes as TAG Heuer’s profitability and sales growth has been underperforming its peers. Also, the new line of Connected Watches may have proven popular, but they are less profitable than mechanical watches and have weighed on the brand’s overall margins, industry sources say. TAG Heuer’s best-sellers include the Carrera and Monaco models, inspired by car racing.

According to the Morgan Stanley/LuxeConsult annual ranking of the world’s top watch brands in terms of turnover, TAG Heuer slipped from 8th position in 2018 to 13th position by 2022 as other brands such as Richemont’s Vacheron Constantin and the privately owned Breitling stole market share.

“For Julien this is a major step up. He’s moving on to a much bigger scale,” a source close to LVMH told Miss Tweed. TAG Heuer is estimated to generate around €700 million in annual sales – around the same level as the brand did a decade ago - while Zenith is closer to €200 million, up from less than €100 million six years ago. “Julien will do a great job at TAG,” the source added.

Tornare is credited with making Zenith more desirable among collectors and young consumers and successfully expanding the brand’s distribution network. Before joining Zenith in 2017, he worked for 17 years at Richemont, lastly as head for Asia at Vacheron Constantin. At the helm of Zenith, Tornare is to be replaced by Benoit de Clerck, who also spent many years at Richemont. The seasoned watch executive already left his job as Officine Panerai Chief Commercial Officer a few months ago, several industry sources have said. He needs to purge his gardening leave, part of the non-competition clause in his contract that prevents him from joining a rival brand quickly. That’s why, for the moment, LVMH cannot announce Tornare’s appointment at TAG Heuer and Frédéric Arnault’s departure, several industry sources have said.

De Clerck has not replied to requests for comment about the planned management changes nor has Richemont. LVMH has declined to comment.

NEW NORMAL

Both Tornare, de Clerck and the young Arnault are embarking on new adventures at a difficult time. The luxury industry – and that includes watches – is going to through a rough patch with demand down in the United States, weakening in Europe and not as strong as expected in China. The valuation of luxury stocks has been hammered in recent weeks as investors worry about the sector’s growth prospects. Some argue the industry is going through a “new normal” of lower growth after the revenge-spending of 2021 and 2022 post-Covid.

It is not yet clear what Frédéric Arnault will do once he leaves TAG. There are several options. One is that he takes on a coordinating role at LVMH’s Watches & Jewelry division, which includes jewelers Tiffany & Co, Bulgari, Fred and Chaumet. It would be a short-term move that would keep him busy until a more attractive position comes up, sources close to LVMH have said. The second option, which is the more likely, is that Frédéric becomes deputy CEO of LVMH Fashion Group under Michael Burke, Louis Vuitton’s former boss.

Over the course of the next few weeks, Burke is expected to become CEO of Fashion Group, as Miss Tweed reported in March. Fashion Group includes Céline, Loewe, Kenzo, Givenchy and many small brands such as Pucci and Patou. Burke’s appointment has not been made official yet. The conditions and terms of his new remit are still being discussed, several sources close to the French group said. If Frédéric was to join Fashion Group, he would gain precious experience in an area of which he knows little. The three sons of Arnault’s second wife, the Canadian pianist Hélène Mercier Arnault, have experience mainly in watches and jewelry. Alexandre (31) is at Tiffany & Co, Frédéric at TAG (28) and Jean (24) works at Louis Vuitton watches. None of them has spent much time working in fashion, LVMH’s core business.

“If Frédéric wants to position himself to replace his father one day, he needs to show that he can run a fashion brand,” a senior source close to LVMH said. Bernard Arnault’s five children are in competition to succeed their father one day. Some say Jean would be the fittest, as he appears to be the most passionate and rigorous, but he may be too young when the time comes to take over. Alexandre is not yet on the top of the list, group insiders say. Hence for the moment, that leaves us with Frédéric. If he does join Fashion Group and becomes Michael Burke’s No. 2, it would be a clear sign that the young man is being groomed to play a bigger role later and his father is investing in his training. Burke is one of Arnault’s most trusted lieutenants.

KEY POSITIONS

Bernard Arnault has placed all of his five children in key positions at the group. The two from his first marriage to Anne Dewavrin have more fashion experience. Delphine, 48, became CEO of Dior this year after being No. 2 at Louis Vuitton. Antoine, 46, was promoted to CEO and vice-chairman of Christian Dior SE, the holding company that controls LVMH. Antoine is already in charge of the group’s image and communication as well as being CEO of luxury shoemaker Berluti and chairman of Loro Piana. He is largely behind the group’s efforts to become more open and transparent.

Earlier this month, Antoine was the initiator behind the family’s donation of €10 million to Les Restaurants du Coeur, an association founded by the French actor Coluche in 1985 that feeds people in need. With rampant inflation, it’s facing a surge in demand and called for sponsors to help. LVMH, one of France’s biggest employers and taxpayers, got flack for that donation from leftist politicians who see the group as a symbol of capitalist evil that just wanted to reduce its tax bill by making this gift.

Few people in the industry see either of the two oldest children wanting to become CEO of LVMH. Antoine is happy in his current role and has never expressed any desire to run the group, while his sister Delphine is not particularly fond of the limelight. While she has an eye for designers and style – she founded the LVMH Prize - she is not regarded by her peers as fully equipped to run such a huge conglomerate as LVMH.

SUCCESSION

Bernard Arnault’s children know that his successor will be nominated by a committee of wisemen, which includes Thierry Breton, who was once France Telecom boss, then French finance minister and now European Commissioner for the Internal Market.

In a recent interview with the weekly Le Figaro Magazine, Bernard Arnault said he wished to see one of his children take over from him some day but that may not necessarily happen. “Depending on the skills of the various parties involved, it may be possible — but it is neither an obligation nor a necessity — for the company's leadership to be handed over to a family member, but it is still too early to decide,” the luxury tycoon told the French weekly.

In an interview with The New York Timesthis summer, Alexandre said about his father: “There’s the risk that none of us is able to run the business as well as he has.” In any event, if Frédéric wishes to climb the ladder of responsibilities at the group, he will need to demonstrate that he knows how to manage creatives and understands the fashion market’s dynamics and product cycles. These are very different from those in watches and jewelry. Joining the group’s Fashion Group would be a good move for him.

“Right now, things are still being discussed internally. Nothing has been firmly decided yet,” a source close to LVMH told Miss Tweed about Frédéric joining the Fashion Group and Burke becoming CEO of the division. In the past few months, Burke has been taking time off to mourn the passing of his wife of five decades, Brigitte. On LVMH’s website, he is described as a strategic adviser to Arnault since February 2023 and a member of the group’s executive committee. At the annual shareholders’ meeting in April, LVMH confirmed Miss Tweed’s report announcing the departure of Sidney Toledano, 72, as CEO of Fashion Group.

Burke successfully led Louis Vuitton for more than a decade and was chairman of Tiffany & Co for two years. Known for his pragmatic no-nonsense approach, he is originally from the United States but resides in France. His friendship with Arnault goes back to the 1980s, when the two entrepreneurs made ill-fated real estate deals in Florida and Arnault returned to France to buy the Dior owner Boussac Saint-Frères. Burke helped Arnault build LVMH and has since held several senior positions within the group.

Frédéric would learn a lot working with Burke, several sources close to LVMH said. “It would make a lot of sense for Frédéric to join Fashion Group. Michael would give him space and he would be a great coach. He has already mentored several people successfully.” Burke has also coached several managers who later on became CEOs or bosses at other brands that are not part of the group.

If Burke does become CEO of Fashion Group, it is expected that he will take under his wing the Italian brands Loro Piana and Fendi. Loro Piana is enjoying strong growth, operating in the sweet spot of so-called “quiet luxury” along with archrival Hermès. Fendi is having a more difficult time as consumers have not been as enthusiastic about Kim Jones’ designs than they were about creations by the late Karl Lagerfeld, industry source said. Jones has been designing for Fendi since 2020, stepping in the big shoes of the Kaiser who passed away on Feb. 19, 2019. Burke will not be expected to micro-manage each brand in the Fashion Group and will only intervene when something needs fixing, several people close to LVMH said. Kenzo is another brand he may have to dive into as sales growth has not met expectations under Japanese designer Nigo, industry sources say. And there are a few others… To be continued…

- There is a risk more tightening might be needed

M&A Can Pay Off, but It’s Far From a Sure Thing

Companies can get better at doing successful mergers and acquisitions, advisers say

Does M&A work? The latest research says it’s a tossup.

Business-school students are often taught that successful mergers and acquisitions are a long shot. One influential Harvard Business Review article, dating from 2011, says a range of studies show roughly 70% to 90% of deals fail to create value for the buyer.

And many investors worry that takeovers are more reliably lucrative for investment banks—which LSEG says earned some $13.1 billion in M&A fees in the first half of this year—than for the acquiring companies and their shareholders.

But more recent research from academics and consultants puts the success rate closer to even. Companies that do frequent smaller deals, as well as making bigger bets, tend to outperform, advisers say. That is because they hone their ability to identify targets, integrate those businesses and reap the intended financial benefits.

Companies should always weigh up deal making against alternative uses of funds, said Barry Weir, Citigroup’s co-head of European mergers and acquisitions.

“If the risk-adjusted return from M&A is higher than the benefits from returning cash to shareholders or some other lower-risk alternative, then it makes sense,” Weir said. “If it doesn’t meet this hurdle then you shouldn’t be doing M&A.”

Since the global financial crisis, stock in companies doing deals worth $100 million or more on average has beaten peers 53% of the time, said Naaguesh Appadu, a senior research fellow at the Bayes Business School of City, University of London who tracks this metric closely.

Deal making can help companies boost sales and profit faster than would otherwise be possible. Buyers can gain customers by moving into new locations, or by adding new products and services, and can cut costs by eliminating overlapping operations.

The risk is that the promised financial benefits don’t cover the often hefty premium paid for a target.

Companies can encounter unanticipated delays, regulatory pushback or extra costs; new products can fail to meet expectations; and key employees can walk out. Big deals also risk distracting top executives from their day jobs. Integrating the target’s operations is often easier said than done and can take longer than anticipated.

One serial acquirer is Thermo Fisher Scientific TMO -0.02%decrease; red down pointing triangle, which sells lab equipment, chemicals and tests. In 2021, the Waltham, Mass.-based company struck a $17.4 billion deal for PPD, a big bet investors applauded.

From six months before the deal was unveiled through the end of 2021, shortly after the deal closed, Thermo Fisher stock gained more than 43%, beating the S&P 500 index, according to FactSet. Appadu at City recommends looking at a buyer’s shares six months ahead of a deal as a starting point for gauging its unaffected stock price.

Thermo Fisher emphasizes keeping employees as key to its deal-making success, and uses the makeup of its management team to show its commitment to incoming staff, Chief Executive Officer Marc Casper said in an interview. That team includes executives from acquired companies, such as Chief Operating Officer Michel Lagarde.

Stock investors often have strong initial reactions to an announced deal, and that first response is often a good longer-term signal, said Mark Sirower, an M&A adviser at Deloitte Consulting. The more a stock rises, the more the market believes the buyer can justify the premium paid, by achieving planned boosts to sales and profit, Sirower said.

His data shows 57% of stocks that started off with a positive performance around the deal announcement stayed ahead a year out, while almost two-thirds of the stocks that initially fell remained lower 12 months later. To measure initial performance, Sirower compares where a stock stands five trading days after a deal is unveiled with where it stood five days beforehand.

Overall, Sirower said his data showed odds of a sizable deal succeeding were “slightly less than a coin flip.” His research shows that between 1995 and 2018, buyers’ stock lagged behind peers 56% of the time in the year after a deal announcement.

Deals that flame out also attract a lot of attention.

In 2019, Fidelity National Information Services FIS 0.92%increase; green up pointing triangle made a big bet on payments processing by buying Worldpay, in a deal that valued the target at roughly $43 billion. The buyer, known as FIS, forecast hundreds of millions of dollars in additional revenue from cross-selling, plus hefty cost savings.

Instead, increased competition led to shrinking profit margins and underwhelming revenue growth at Worldpay. Within four years, FIS had taken a $17.6 billion noncash charge against its payments-processing business, and in July it sold a majority stake in a deal valuing Worldpay at $18.5 billion.

“FIS was on the wrong side of change of where future growth was going to come in processing payments,” as it tried to keep pace with rivals as the sector consolidated, said Dan Dolev, an analyst at Mizuho Securities.

FIS declined to comment.

Private equity M&A set to whittle sector down to 100 ‘next-generation’ firms

Split between managers that can raise money and those that cannot will lead to consolidation, predicts Partners Group CEO

The number of private market fund managers will shrink to as few as 100 over the next decade as higher interest rates, fundraising challenges and increasing regulatory costs drive a massive wave of consolidation, according to a leading European private equity firm.

David Layton, chief executive of Partners Group which oversees assets of $142bn, said private markets had entered a “new phase of maturation and consolidation”. Managers responding to fundraising pressures in more difficult economic conditions and shifting towards wealthy individual clients as a driver of new asset growth, would drive a significant rise in mergers and acquisition activity, he said in an interview.

“It is really only the large players that can withstand the forces reshaping the private markets industry. We could see the current 11,000 or so industry participants shrink to as few as 100 next-generation platforms that matter over the next decade,” said Layton.

Assets held in illiquid private market strategies stood at $12tn at the end of December, according to consultancy Preqin. The firm estimated that total private markets fundraising dropped 8.5 per cent last year to $1.5tn with net inflows into private equity managers down 7.9 per cent to $677bn in 2022.

Many smaller PE managers have found the process of attracting new business increasingly difficult. The top 25 largest competitors have captured more than a third of the $506bn of new capital allocated PE so far this year.

“There is a real bifurcation between the managers that can raise money and those that cannot. This will accelerate the process of natural selection as the industry grows in size,” said Layton.

Leading industry executives have been predicting the shifting landscape in alternative asset management. Consolidation is already happening with deals such as the acquisition this month by CVC of a majority stake in the Dutch infrastructure investor DIF Capital Partners for around €1bn in cash and shares.

Bridgepoint announced this month that it was buying Energy Capital Partners, a US-based renewables specialist, in a cash-and shares deal worth about £835mn.

Jon Moulton, the founder of UK-based Better Capital, said “massive changes” were approaching given the difficulties faced by smaller PE funds in securing support.

“Institutional investors would much prefer to make a single $1bn allocation to a large PE manager than write a stream of $100mn tickets,” said Moulton.

All PE managers also face the prospect of increased legal and compliance costs due to new US reporting requirements, a burden that will weigh disproportionately on smaller firms.

Hugh MacArthur, global chair of Bain & Co’s private equity team said historically PE consolidation had “largely been a non-starter” because of integration problems involving culture clashes, executive pay and performance fees. However, more firms were now looking for new ways to grow assets.

“Adding asset classes to a larger platform, geographic expansion, new customer channels and strategic distribution are all means to that end. The real challenge is translating M&A into sustained organic growth,” said MacArthur.

Layton played down the prospect of Partners embarking on an M&A spree but predicted more deals between traditional asset managers looking to broaden their suite of investment capabilities and alternative investment managers that need access to bigger distribution networks.

Partners Group expects assets in private markets to reach $30tn, helped by increasing allocations by wealthy individual investors into new “evergreen” fund structures which do not have a finite lifespan.

The Switzerland-based firm also intends to offer more multi-asset class mandates that can be tailored to the needs of institutional clients.

Many PE managers secured debt on highly favourable terms during the era of ultra-low interest rates. Looming debt refinancing requirements could accelerate the consolidation process.

Increases in interest rates mean expected returns for private equity investments have dropped by around 400 basis points, according to Partners Group. This could leave private equity executives, known as general partners or GPs, facing difficult choices about their debt funded investments.

“Many of the sellers of private market assets are anchored in yesterday’s valuations while a lot of buyers are saying ‘this is a new world’ [for pricing],” said Layton.

From demographics to decoupling, China faces challenges Japan didn’t after its 1980s bubble

HONG KONG—Starting in the 1990s Japan became synonymous with economic stagnation, as a boom gave way to lethargic growth, declining population and deflation.

Many economists say China today looks similar. The reality: In many ways its problems are more intractable than Japan’s. China’s public debt levels are higher by some measures than Japan’s were and its demographics are worse. The geopolitical tensions that China is dealing with go beyond the trade frictions Japan once faced with the U.S.

Another headwind: China’s government, which has been cracking down on the private sector in recent years, seems ideologically less inclined than Tokyo was then to support growth.

None of this means China is sure to repeat the years of economic stagnation that Japan is only now showing signs of exiting. It has some advantages that Japan didn’t. Its economic growth in coming years is likely to be well above Japan’s in the 1990s.

Even so, economists say the parallels are a warning for Communist Party leaders in Beijing: If they don’t act more forcefully, the country could get stuck in a protracted period of economic sluggishness similar to Japan’s. Despite piecemeal steps in recent weeks, including modest interest-rate cuts, Beijing has held back on major stimulus to revive growth.

“China’s policy responses so far could put it on track for ‘Japanification,’” said Johanna Chua, chief Asia economist at Citigroup. She believes China’s overall growth prospects could be slowing more sharply than Japan’s.

China today and Japan 30 years ago share many similarities, including high debt levels, an aging population and signs of deflation.

During a long postwar economic expansion, Japan became an export powerhouse that American politicians and corporate executives worried would be unstoppable. Then in the early 1990s, real estate and stock market bubbles burst and the economy hit the skids.

Policy makers cut interest rates to virtually zero, but growth failed to rebound as consumers and companies focused on repaying debt to repair their balance sheets instead of borrowing to finance new spending and investment.

Richard Koo, an economist at the research arm of Japanese investment bank Nomura Securities, famously coined the term “balance sheet recession” to describe the phenomenon.

China, too, has seen a property bubble pop after years of extraordinary economic growth. Chinese consumers are now paying off mortgages early, despite government efforts to get them to borrow and spend more.

Private firms are also reluctant to invest despite lower interest rates, stirring anxiety among economists that monetary easing might be losing its potency in China.

By some measures, China’s asset bubbles aren’t as big. Morgan Stanley estimates that China’s ratio of property value to gross domestic product peaked at 260% in 2020, up from 170% of GDP in 2014; home prices have only fallen slightly since the peak, according to official data. China’s equity markets hit a recent peak of 80% of GDP in 2021 and now sit at 67% of GDP.

In Japan, land values as a percentage of GDP reached 560% of GDP in 1990 before falling back to 394% by 1994, Morgan Stanley estimates. The Tokyo Stock Exchange’s market capitalization rose to 142% of GDP in 1989 from 34% in 1982.

Also in China’s favor, its urbanization rate is lower, standing at 65% in 2022, versus Japan’s, which was at 77% in 1988. That could give China more potential to raise productivity and growth as people move to cities and take on nonagricultural jobs.

China’s tighter control over its capital markets means the risk of a sharp appreciation of its currency, which would harm exports, is low. Japan had to deal with a sharp increase in its currency several times in recent decades, which at times added to its economic struggles.

“We believe worries on China being trapped in a balance sheet recession are overdone,” economists from Bank of America recently wrote.

Yet in other ways, China’s problems will be harder to tackle than Japan’s.

Its population is aging faster; it began to decline in 2022. In Japan, that didn’t happen until 2008, nearly two decades after its bubble burst.

Worse, China appears to be entering a period of weaker long-term growth rates before reaching rich-world status, i.e. it is getting old before it gets rich: China’s per capita income was $12,850 in 2022, much lower than Japan in 1991 at $29,080, World Bank data shows.

Then there is the problem of debt. Once off-balance-sheet borrowing by local governments is factored in, total public debt in China reached 95% of GDP in 2022, compared with 62% of GDP in Japan in 1991, according to J.P. Morgan. That limits authorities’ ability to pursue fiscal stimulus.

External pressures also appear to be tougher for China. Japan faced a lot of heat from its trading partners, but as a military ally of the U.S., it never risked a “new Cold War”—as some analysts now describe the U.S.-China relationship. Efforts by the U.S. and its allies to block China’s access to advanced technologies and reduce reliance on Chinese supply chains have sparked a plunge in foreign direct investment into China this year, which could significantly slow growth in the long run.

Many analysts worry Beijing is underestimating the risk of long-term stagnation—and doing too little to avoid it. Moderate cuts to key interest rates, lowering down payment ratios for apartments and recent vocal support for the private sector have done little to revive sentiment so far. Economists including Xiaoqin Pi from Bank of America argue that more coordinated easing in fiscal, monetary and property policies will be needed to put China’s growth back on track.

But President Xi Jinping is ideologically opposed to increasing government support for households and consumers, which he derides as “welfarism.”