MILAN, Italy — On a hopeful day in early April 2019, crippled fashion brand Roberto Cavalli was handed a temporary crutch when an Italian court granted the debt-ridden label 120 days of protection against creditors while it devises a new turnaround plan. The news of the extension came at the end of two torturous weeks, during which the company was forced to close its US operations as investor Clessidra, an Italian-based private equity firm, sought to sell its stake.

What happens next for the house, once a bastion of flashy, fun Italian style, is still uncertain. But whatever the outcome, the case of Roberto Cavalli shows how private equity investment can sometimes go very wrong. Clessidra, a €2.5 billion fund that likes to invest in family-run Italian businesses, lacked the strategic knowhow to understand what the turnaround of a luxury fashion brand would take, and were not willing to pour additional funds into the project when results took longer than expected to materialise.

These are the sort of unfortunate circumstances that make luxury fashion labels wary of private equity, a class of investor that expects its ventures to scale quickly and efficiently, resulting in an exit within a three-to-five-year time frame. Such a speedy process can be out of sync with the timelines for scaling — or saving — a luxury brand, which requires consumer education and careful distribution that can take far longer.

If you get sold to a strategic [partnership], you become a super-employee of a company you used to own.

But not all such deals are fraught. For fashion brands seeking outside capital, partnering with a private equity firm can drive impressive results. Consider the case of French fashion group SMCP, which owns Sandro, Maje and Claudie Pierlot. In 2013, New York-based private equity firm KKR bought a 65 percent stake in the business at a valuation of €650 million. In 2016, KKR sold to Chinese textile conglomerate Shandong Ruyi at a €1.3 billion valuation, including debt. While the exact terms of the deal were not disclosed, it was perceived as a success in the market.

Same for Italian luxury outerwear firm Moncler, which partnered with several private equity firms — including Mittel Private Equity and the Carlyle Group — before its smashing 2013 initial public offering that valued the company at more than $3 billion. In 2011, Moncler received backing from multinational private equity firm Eurazeo, which bought a 45 percent stake for €418 million that left chairman Remo Ruffini with a 32 percent stake and Carlyle with a 17.8 percent stake.

Eurazeo maintained a stake in Moncler until early 2019, when it sold its remaining shares for €445 million. In the end, Eurazeo made a total €1.4 billion on its eight-year Moncler investment.

Then there's Versace, which sold for $2.1 billion to Capri Holdings in September 2018, doubling the Blackstone Group's €200 million investment in about four years. (The firm acquired a 20 percent stake in the Italian brand in 2014.)

It's notable that KKR, Eurazeo and Blackstone, the backers behind three of the most successful fashion exits in recent years, are all publicly traded companies, meaning that they invest from their balance sheet. "We do not have limited partners, which gives us a lot of flexibility when it comes to cheque size, investment time frame and whether we do a minority or majority deal," said Jill Granoff, chief executive of Eurazeo Brands, a US-based division of the firm that has done deals with athleticwear retailer Bandier, as well as Pat McGrath Labs.

[Private equity firms'] entire strategy and value creation is, by definition, driven by their exit.

However, success in private equity very much depends on achieving a certain alchemy that blends ambition, scalability and dedication on both sides.

A private equity investor is a good prospect for founders and business owners wanting to take “a second bite of the apple.” Unlike a strategic investor — like an LVMH or a Kering — which typically plans to own a business for many decades, if not forever, private equity firms are always looking for an exit, either through a public flotation or by selling its stake to another buyer. A founder who takes home a cheque when he sells a stake to a private equity firm may make additional money in future transactions at potentially higher valuations, as is what happened with SMCP or Moncler. Strategic acquisitions, on the other hand, are more final.

“If you get sold to a strategic, you become a super-employee of a company you used to own,” said David Ayache, an M&A attorney working with a number of fashion and luxury clients. (For instance, he advised Fung Brands when it acquired Sonia Rykiel.)

This allows founders to maintain the semblance of independence that often crave, but it also means that "you have to make sure you keep growing the company at a fast pace," said Ariel Ohana, co-founder of investment bank Ohana & Co, which advised Bandier on its recent $34.4 million growth equity funding round, led by Eurazeo Brands.

The good news is that private equity brands want to help with that. Because these firms are looking for a swift exit — typically three-to-five years — they often "bring focus and discipline" to the business, said Elsa Berry, co-founder and managing director of Vendome Global Partners, an advisory firm specialising in luxury, beauty and premium consumer brands. (Recent deals include the sale of Dries Van Noten to Puig.)

For young brands that want to expand but aren’t necessarily ready to sell the entire business, private equity can serve as a “strategic sounding board,” Berry said, providing operational support on retail expansion, global expansion, supply chain, e-commerce, customer acquisition and product category extension.

It's harder and harder for companies relying on retail to be profitable.

They also can provide the funds to develop the retail network, an expensive prospect for an emerging label, even one that is generating upward of $40 million a year. For instance, Danish fashion line Ganni partnered with LVMH and Groupe Arnault-backed private equity firm L Catterton in 2017 with hopes of extending its store network, opening five-to-six new locations a year.

Firms that employ investment partners who have at one time worked in operations are a plus. For instance, Eurazeo Brands is headed by Granoff — former chief executive of Vince and Kenneth Cole — and managing director Adrianne Shapira, former chief financial officer of David Yurman.

“We have 25 years of experience building brands,” Granoff said. “I think that’s highly appealing to founders and management teams.”

What’s more, private equity firms often offer a certain credibility that helps to attract good operational talent and build relationships with banks and other financial institutions. “When loaning and lending money to [emerging] brands, banks often get cold feet,” Ayache said.

The biggest drawback of private equity may be the set time frame. “Their entire strategy and value creation is, by definition, driven by their exit,” Berry said. “And a short-term exit can be a problem.”

Given the cyclical, unpredictable nature of the fashion business — not to mention the uncertainty around its business model — a successful five-year exit is almost always impossible. It’s part of the reason private equity firms are increasingly focused on beauty, where there are still several strategic investors looking to acquire billion-dollar brands.

“Apparel companies are still looking for their distribution model,” Ohana said. “It’s harder and harder for companies relying on retail to be profitable.”

The success of a brand, especially if you are in luxury, is very much dependent on the artistic director.

If a brand cannot scale, the private equity firm may do what Clessidra did to Cavalli — simply stop investing until it can sell the brand or until the brand goes bankrupt — or the brand may buy back the private equity firm’s stake, often at a reduced price.

This is what happened in 2017 with premium denim label Citizens of Humanity, which bought back Boston-based Berkshire Partners' 40 percent stake in the company, acquired in 2006 for an estimated $250 million including debt, for an undisclosed sum. In 2018, Tory Burch bought back Mexican private equity firm Tresalia Capital's 20 percent stake in the business, although investors General Atlantic and BDT Capital Partners remain committed.

If the private equity firm cannot find a new investor, the company often files for bankruptcy protection. In the worst cases, the company becomes insolvent and must liquidate its assets, as with Cavalli’s US operations.

There are several reasons this may happen. One is a negative turn in creative direction that causes loyal shoppers to flee.

“The success of a brand, especially if you are in luxury, is very much dependent on the artistic director,” Ayache said.

But it can also be that the private equity firm simply doesn’t have the industry knowledge needed to support growth. “They’re often more financially oriented,” Berry said. “What they bring is related to financials, but less of a strategic value-add.”

The ideal scenario, then, is finding a private equity investor that comes with expertise, patience and an ability to sniff out unique business models with the potential to scale. Eurazeo, for instance, held out for eight years to fully exit its investment in Moncler. That €1.4 billion appeared to be worth the wait.

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