A look at private equity in the furniture industry
Private equity has played a highly visible and important role in the evolution of the residential furniture industry. Many folks think PE is a risky, or worse a financial engineering trick, while others have lived through tremendously positive transactions to create enduring corporate leaders.
Love it or hate it, Private equity now accounts for 30% of deal activity, making it a critical feature of the merger and acquisition landscape.
Two great historical PE successes in the industry history would be:
Ethan Allen – In 1989, current Chairperson Farooq Kathwari led a buyout of Ethan Allen, which was being divested by conglomerate Interco (which later became Furniture Brands International). Prudent equity and debt financing was secured, and Ethan Allen thrived and later went public. Today, Ethan Allen is one of our industry’s largest public companies and among its best performers. https://www.upi.com/Archives/1989/05/22/Interco-sells-Ethan-Allen/8514611812800/
Lexington Home Brands – In the melt-down of the Masco/Lifestyle debacle, many portfolio companies were sold off, and Lexington was acquired by Sun Capital in 2002. The company stabilized under new ownership and a new management team, and it delivered a long track record of success. When Sun sold Lexington in 2017, it named a corner conference room the “Lexington” room and stated on its entryway that it had been one of its best investments ever made. Today, Lexington remains a top performer and a top 25 brand in our industry. https://www.thefreelibrary.com/LIFESTYLE+FADES+WAY+WITH+LEXINGTON+BUYOUT.-a083365074
The residential furnishings industry today has more than 40 companies controlled by PE firms, and there are many successes (and some failures). Almost by definition, PE owners will eventually sell their position, and we expect M&A activity to be brisk the next few years as existing PE owners exit and new firms seek investments. Last year was a record year in the U.S. for total deal volumes, and in most industries most prognosticators are expecting another strong year in 2022.
What is driving this surge in transactions?
- Availability of affordable debt and equity. Banks are eager to lend at low interest rates, and PE firms are flush with cash. Some estimates suggest that more than $1 trillion is uninvested in existing PE funds. The Feds recent announcement of multiple rate hikes over the course of 2022 will be important to watch.
- Furniture is hot! The consumer wants more and better furniture since they are home more and at the office less and traveling less. This trend should stay in place for a while. Casual outdoor furniture is a particularly a hot category as COVID-19 has taught us all the benefit of socialization (and living) outdoors.
- E-commerce: Technology and in-stock inventory and immediate satisfaction of 1- to 2-day delivery is making furniture accessible and easier than ever to make impulse purchases.
- Demographics: The Baby Boomers are moving to new homes and buying second homes, the urban folks are considering larger homes in the suburbs, and the younger generations (which are large) are buying houses. New home formation is a key driver to furniture purchases and home starts are at a 15-year high.
- Wealth effect: With stocks prices at all time highs and home values at record levels, the consumer feels wealthy and has confidence to purchase more furniture.
These are impactful trends that are drawing investors to our industry. Keep an eye on the PE marketplace and expect to see some high-profile transactions in 2022.
Our favorite quote about PE investors comes from a recent encounter with a CEO. When asked by a potential PE investor about “what keeps you up at night,” the CEO replied: “Sir, I worry that you and your PE partners will tell me what to do.”
We find that the PE firms with the greatest success do as Warren Buffett suggests: “Find a great management team and back them and let them do their job.”
