Asia’s aspirational brands: It’s how you pick ‘em

L Capital closed its most recent Asian fund in April of last year at $650 million. If the firm raises a new vehicle just as quickly - and most of the money will come from its parent - it would have more capital in play than most independent mid- market private equity shops.

Several surveys now rank China as the world's second-largest consumer of luxury goods and McKinsey & Company expects sales of luxury goods in the country to reach $27 billion by 2015, accounting for 20% of the global market. India lags its neighbor, although it is still viewed as a key target market, with Bain & Company predicting compound annual growth of 5-10% over the next few years.

This is all very well for the Louis Vuitton, Moet and Hennessy brands, but it's not necessarily what L Capital is aiming at. Analysts talk of "accessible" and "aspirational" brands, which opens up luxury investing to a much broader scope than one would typically expect in more developed markets. Hanji Huang, L Capital's Greater China managing director, told AVCJ last year that he looks for the "three As" - alternative, affordable and aspirational.

Recent investments suggest as much: China's Xinhe Fashion, which has six brands and a 600-store sales network; up-and-coming Indian designer Genesis Luxury Fashion; Chinese casual-wear company Trendy International Group; and, reportedly, India's Fabindia, which is best known for its handmade ethnic clothing and jewelry. Perhaps they're not household names outside their own industries or countries, but maybe they one day will be.

China and India appeal because their domestic retail bases are so large that brands have real scalability. The private equity value-add, therefore, is very much tied to operational and marketing know-how: Are products meeting consumer needs at the right price point and also traveling from factory to shop floor to shopping basket in a cost efficient manner? This is equally relevant to both mass-market and higher-end brands. And in an ideal world, a retailer will have both, so as to capture as much of the market as possible.

Comparisons have recently been drawn between the challenges facing Daphne, a Chinese women's shoe retailer and Chinese sportswear brand Li Ning. TPG Capital managed to turn around the fortunes of the former and stock market investors are hoping it can do the same with the latter.

Daphne's return to profitability was put down to an expansion of its retail network and a strong performance by its core brands, which between them cover the mid to upper tiers of the mass market segment. Li Ning's problems are said to stem from a decision to move out of the mass market, hike prices and focus on first-tier cities in search of the higher margins secured by Nike and Adidas. It failed to challenge the global brands and promptly saw lower-end domestic competitors grab its share of the mid-market.

The lesson for private equity investors is be careful how you pick your portfolio companies and how you work with existing management. Brands should be aspirational, but not have aspirations beyond what can realistically be achieved in their respective markets and within certain timeframes.

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• Topics
• Greater China
• South Asia
• Consumer
• Investments
• L Capital Asia
• Consumer
• China
• India
• TPG Capital