Why it makes sense to invest in the creative industries and support them
While many fast-growth companies in the creative industries are currently the target of heavy private equity investments and a flurry of mergers and acquisitions, it makes sense, from a tax and financial standpoint, for individuals and corporate investors to go ‟long” on creative startups and SMEs.
1. ‟Good times” are coming back: it’s time to invest in the creative industries
With the global economy recovering from the 2007-2012 recession and a tangible boost of confidence, financial investors and corporates alike are becoming more bullish and enterprising, especially in relation to the creative industries. It is time to invest in the creative industries.
In the luxury goods sector, the historical data is very promising, with 2012 being the third year in a row of double- digit growth for personal luxury goods, at 10 percent annual growth rate, now over the Euro200 billion ceiling (1). There was no recession at all, in the luxury goods sector.
As a reflection of the outperformance of this creative sector, many luxury stalwarts have been either acquired (such as Loro Piana and Bulgari sold to LVMH as well as Christopher Kane and Pomellato sold to Kering), invested into (such as the investment of equity investment funds Ardian and Blackstone into a minority participation stake in Versace (2) and the negotiations for an investment made by buyout firm Permira into a Euro450 million majority stake in Roberto Cavalli (3)) or introduced on the stock market at sky-rocketing valuations, which are ever increasing (Prada, Salvatore Ferragamo, Michael Kors, Brunello Cucinelli).
The technology sector is also back to acquisitive mode in full swing, with Facebook spending USD19 billion (!) to purchase WhatsApp, a cross-platform mobile messaging app for iPhone, BlackBerry, Android, Windows Phone and Nokia, which allows to send text, video, images, audio messages free of charge.
The USD19 billion figure is split between USD4 billion in cash, USD12 billion in shares and USD3 billion in Facebook shares, which will be distributed to the founders and employees of WhatsApp, spread over four years after the closing of the deal. Sequoia, the investment fund which invested USD8 million for 15% of WhatsApp’s capital in 2011, is about to make USD3.5 billion out of this transaction.
Juicy business.
With many sectoral experts saying, and proving, that the creative and cultural industries are the booster to global and, in particular, European, growth and recovery (4), the future looks very bright indeed for all those companies which main assets are theirintangibles (knowhow, intellectual property, brand value, reputation, etc).
2. How to benefit from the bullish market in a tax efficient way
If you have some back pocket money (5), i.e. some money sitting around idly in a savings bank account remunerated between 0.5 percent and 1.00 percent, which you absolutely do not need in the short and medium term and which you would not feel badly hurt if you were losing, now is the time to take advantage of the situation.
The taxman is generous to individuals ready to part with their cash to invest in the creative industries, on both sides of the Channel.
In Great Britain, HMRC is only inclined to give tax credits to individuals, the so-called ‟business angels” who are UK tax residents with an entrepreneurial mind. Enterprise Investment Schemes (‟EIS”), Venture Capital Trust (‟VCT”) and Seed Enterprise Investment Scheme (‟SEIS”) are the three tax tools through which individuals can invest in eligible companies (i.e. companies with no more than 250 employees or gross assets lower than GBP15 million, or GBP200,000 for a SEIS) in a tax efficient way.
Tax breaks are summarised below:
SEIS:
Maximum investment: GBP100,000
Inc tax relief/investment: 50 percent
Holding period: 3 years
Capital gain tax: exemption EIS:
Maximum investment: GBP1 million
Inc tax relief/investment: 30 percent
Holding period: 3 years
Capital gain tax: exemption
VCT:
Maximum investment: GBP200,000
Inc tax relief/investment: 30 percent
Holding period: 3 years
Capital gain tax: exemption
In France, individuals who have to pay the French wealth tax (wittily called ‟impôt de solidarité sur la fortune” (‟ISF”), and invest in SMEs, are also rewarded by the French state.
Through the ‟ISF PME” tax breaks, individuals subjected to the ISF can deduct up to 50 percent of the sums invested in French SMEs, up to Euro45,000 per year (6).
For everybody else who pays income tax in France, a new tax break of 18 percent of the cash invested in a French SME, capped at Euro50,000 per taxpayer per year, has been set up (7).
If the SME you have invested in goes bust, you will still have been able to take advantage of the tax breaks. If the SME produces many sparks and is being acquired, at a later stage, by a private equity investment fund, a competitor or any other third party, the early-stage investor individual will be able to cash in and realise a substantial capital gain on its early investment. In the UK, such capital gain is exempted from taxation, unlike in France. That may explain why there are more than 50,000 business angels in the United Kingdom and around 5,000 (!) in France.
Sadly, corporate venture is not currently actively encouraged by either the French or British governments, which results in Euro230 billion sleeping idly in the coffers of all the companies listed on the French CAC40 index, for example.
More lobbying should be done, by institutions representing the creative industries such as Comité Colbert, Fondazione Altagamma, Walpole and the European Cultural and Creative Industries Alliance, to influence governments to provide tax incentives to companies wishing to invest in SMEs in a tax efficient way.
Positive changes are looming though, since corporate venture should kick off on 1 July 2014 in France, with companies paying taxes in France being able to amortise their corporate venture investments in innovating SMEs over a period of five years (8).
Let’s watch the space and hope that Cameron and Osborne are going to take stock and act accordingly, in the UK soon.
It is time to think carefully how to invest any spare cash that you may have and, with the bright economic outlook and new tax schemes pushed by governments to accelerate growth and recovery, both individuals and corporates have more and more investment options at their disposal, to encourage innovative and creative industries.
(1) Luxury goods worldwide Market Study Spring 2013 Update, Bain & Company
(2) M&A in 2014? Luxury brands on sale or seeking for financial partners, Portolano Cavallo Studio Legale (3) Sources Say Roberto Cavalli Nearing €450 Million Sale to Permira, Business of Fashion
(4) 1er panorama des industries culturelles et créatives, EY, November 2013
(5) Back pocket money, Jimmy C. Newman
(6) ‟Réductions, impôt de solidarité sur la fortune”
(7) ‟Réduction d’impôt pour souscription au capital de sociétés non cotées”
(8) Corporate venture: ‟pour financer l’innovation”
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Next steps for British fashion industry: intellectual property, manufacturing & talent
Annabelle Gauberti, founding and managing partner of Crefovi, was a speaker at the Westminster media forum keynote seminar on Next‟ steps for British fashion industry: intellectual property, manufacturing and talent”.
This seminar on the next steps for British fashion industry was held on the morning of Tuesday 15 October 2013, in central London.
Annabelle and other speakers discussed the legal issues and challenges surrounding intellectual property protection, in the context of fast-fashion, knock-offs and licensing.
How far is the importance of securing design rights and other intellectual property rights, understood by SMEs and others in the fashion industry? Does the current design rights system offer designers adequate protection of their rights? What would be the likely effect of a move to the Hague System?
These were some of the questions discussed during this exciting seminar!
We encourage you to review the transcript of this extremely informative and well-documented fashion seminar. Caroline Rush, chief executive of the British Fashion Council and John Miln, chief executive of the UK Fashion and Textile association, were also guest speakers to this event.
You can view the agenda for this seminarhere and the transcript of this event here.
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Business breakfast on fashion finance law on Tuesday 30 July 2013
We had a great time, on Tuesday 30 July 2013, during the business breakfast during which we presented our proprietary research on fashion finance. During our presentation on fashion finance law, the audience was really paying attention and asking incisive questions on the tools and tips to get funding!
Please find below our video and slides of the seminar, as well as some information on the content of this cutting-edge presentation on fashion financing.
You will need initial funding to create your first, second or even third collection and set up your fashion business. While family & friends, grants and loans can be a source of financing, don’t underestimate the value of intellectual property (‟IP”) in the context of obtaining funding for your fashion business.
This video was created with the efficient and proactive contribution of the London Film Academy. Thank you LFA!
During this B@B, we covered: tools and tips to get funding;
the different financing sources available to you;
your business plan – key considerations;
attracting third party financial investment – and the important role of IP;
key clauses in partnerships or equity finance agreements, and
next steps after you secured funding.
The speaker is Annabelle Gauberti, founding and managing partner of London fashion law firm Crefovi, an expert in fashion finance law.
She has more than 10 years of experience practising the law of luxury and fashion law, both in the UK and France. Annabelle advises fashion houses, financiers, security providers, on various aspects of fashion finance law.
Her clients base includes fashion houses, designers & models, artists, film production companies.
She is steeped in finance & corporate law, and has been involved in many matters, either contentious or non- contentious, relating to intellectual property, trademark litigation, selective distribution, franchising, tax & internet law.
Annabelle has more than ten years of experience practising fashion law, also known in France as “droit du luxe” (law of luxury goods) and she has written numerous publications about it.
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Δ Financing luxury companies: the quest of the Holy Grail (not!)
The main characteristic of a luxury company is the importance of its brand’s value. This is by far the most crucial asset of a luxury business. It is due to the extreme concentration of intangibles that such brand embodies.
Since the value of a luxury business is, above all, the financial valuation of its brand, the luxury company’s management needs to implement a strategy that will boost such brand equity. This is the goal of financing luxury companies.
1. What does it take to build a luxury brand with a strong financial valuation?
This implies that the financial strategy will be to maximise, not the net profit, but the luxury brand’s value. Another consequence is that since brands have never been set out on the balance sheet at their true worth, successful luxury companies generally have a very high return on equity, a phenomenon often accentuated by very high profitability.
So, what does it take to implement a strategy that unlocks a luxury brand’s equity?
It takes a lot of time and money to build a lasting luxury brand. Given the importance of the investment to be made in creation, communication and distribution, which are strongly qualitative and only profitable over the long term, a very high gross margin (in the order of 80 per cent) is crucial to the brand’s survival.
To achieve such high gross margins in the long term, some basic rules must be followed from the inception of a luxury brand.
The first one is to be profitable in the core trade first: the burgeoning luxury brand needs to remain concentrated on the core trade and extend only progressively, and in a controlled manner, to luxury goods beyond its core. A luxury brand is deep in deficit at the beginning, since it cannot waver on the product quality it offers, while its low recognition makes it impossible to sell at high prices. This deficit should be considered as an investment on the brand’s content.
The young luxury company must then set the virtuous spiral in motion by:
increasing its sales volume, and thus its production;
lowering its costs, enabled by the experience effect, which leads to a rise in margins, since retail prices are maintained at the same level;
investing in communication, thanks to the release of the level of finance made, and ultimately, increasing sales prices, made possible by ongoing recognition of the luxury brand.
Diversifying into other products before achieving profitability in the core trade would be a mistake, and could even be fatal to the emerging luxury company.
The second rule is to ensure human stability and coherence of teams. These stable teams will bring creativity of consistent quality, hence fostering brand loyalty in the luxury company’s customer base. When the luxury company launches into products’ diversification, its management team should be mindful of troop morale, since such diversification could be perceived as a rejection of existing lines and their teams. Diversification consuming a great deal of cash, to the detriment of the core trade, management must explain its expansion strategy to its teams, and ensure that money is appropriately spent during the implementation of such diversification.
Meanwhile, it is important for the luxury company to keep on investing strongly in its brand and distribution, in order to maintain a very robust brand and thus be shielded from any risks generated by the diversification. Often, part of the royalties, paid by licensees to the luxury company, as a result of products diversification into perfumes, eyewear or children wear, for example, will be reinvested in the luxury brand and distribution.
Achieving high margins for a luxury company always requires seeking the minimum volume of sales beyond its own borders: internationalisation, and then globalisation, is the law of luxury. Only the demand side should be expanded abroad, though, certainly not the production side in order to reduce costs, as this would greatly damage the luxury brand.
When a luxury company consistently follows these rules, it usually generates exceptional profitability on turnover, over time. Initially, it must concentrate the bulk of its small capital on the development of its production volume in order to be profitable at the desired sales price. Then, when the luxury company has reached a reasonable cost price, it should swing the majority of its investment into communication, including the development of a quality distribution network.
2. What types of financing exist, for luxury brands?
Luxury companies, with their high gross margins and net profits rates [1], have become attractive targets for financiers. Private equity funds, in particular, have delved into the luxury world with enthusiasm. From Jimmy Choo [2], to Hugo Boss [3] and La Perla [4], quite a few luxury brands have been acquired, or heavily invested into, by equity financiers.
For young luxury companies, finding a committed, yet not overbearing, equity finance partner is really a way to kick- start their brand to the next level. For example, England- based ready-to-wear and bespoke tweed company, Dashing Tweeds, was initially backed-up by equity investors, allowing the brand to grow and reach national recognition through a major collaboration with high street chain Topshop.
Equity investments may be easier to secure for UK-based luxury businesses, since there are 50,000 business angels in the UK compared to 8,000 in France, and since London is the largest hub for private equity and venture capital funds in Europe. However, the French business angels community, in particular France Angels, is keen to invest in French emerging luxury companies and has inaugurated the Réseau‟ mode Business Angels” in December 2012, to federate business angels around equity investments for fashion and luxury start-ups.
For luxury and fashion start-ups, which do not have ‟proof of concept” yet, and therefore cannot convince business angels and venture capital funds to invest in their companies, a solution may be crowdfunding. In spring 2013, AudaCity of Fashion, a crowdfunding platform dedicated to fashion and luxury startups, will launch in the UK. This way, individuals will network and pool their money to collectively support efforts initiated by fashion and luxury startups.
Coming back to private equity investments, these may be a way for the founders of a mature luxury company to ‟cash in” and get financially rewarded for all their prior hard work. However, problems arise if the laws of luxury management are not scrupulously complied with. Indeed, if these laws, which are the opposite of traditional marketing laws, are not respected, further to the equity investments, the high profitability of the luxury brand becomes volatile as a result. These laws of luxury management are often unfamiliar to non-specialists and are highly subjective and qualitative, therefore far from the quantitative measures dear to financiers. One of the easy traps to fall into, is to force a reduction in structural expenditure on maintaining the luxury brand, particularly if that brand is undergoing short-term pressure from shareholders because of temporary falling profitability. While these cuts in ‟useless” expenditure may seem to have an immediate positive impact on the operating results of the luxury company, the cuts damage the brand and image in a way which is invisible, at first, but which, a couple of years down the line, may be irreparable.
In addition, the exact valuation of the luxury company may become an issue, during the negotiations between the luxury company’s owners and the private equity financiers, as the valuation of the brand is based on an extreme concentration of intangibles, difficult to measure in factual terms.
Another external strategy to find funding for a luxury company is to get access to debt financing. While this would be a relatively easy move for an established luxury business, because it already has several sets of annual returns and statements to prove its financial stability, an emerging luxury company may struggle. Mature luxury houses, which can provide evidence of solid sales revenues, have access to global debt markets, tapping into investment grade facilities, bridge loans, or, even more sophisticated loan products such as structured trade finance. For example, a fur brand like Hockley may approach its usual bank to finance the purchase, at auctions, of extremely high quality and expensive furs. Such short-term financing would be secured against these furs. Hockley would then make some luxury coats or accessories out of these furs and pay back the capital and interest deriving from the structured trade financing, by way of regular instalments, using the cash flow generated by the sale of these luxury products over time.
As debt finance is difficult for them to access, emerging luxury companies may look at factoring as a viable alternative for the management of their cash flows. Factoring seems relatively difficult for SMEs to obtain in the UK, while it is a standard and often-used financial tool in France and the US. Factoring companies such as GE Capital or Hilldun Corporation in the US, Eurofactor, BNP Paribas Factor or Natixis Factor in France, agree to advance 80 to 90 percent of the total amount of an invoice, to the luxury company, after such luxury company has delivered its merchandise to its distributors. The remainder of the invoice, minus the costs for the factoring service, is paid back to the luxury company when the distributor pays the factor. Costs for the factoring service vary between 0.6 to 3 percent of the amount of the invoice. Such costs are based on the luxury company’s annual turnover, number of invoices issued and number of clients.
National trade associations, keen to nurture creativity and innovation, have provided several financing tools for emerging luxury and fashion companies.
One of the most innovative tools is the ‟Banque de la Mode” (i.e. fashion bank), launched in March 2012 in Paris. Chanel, Balenciaga and Louis Vuitton Malletier, among others, have pooled their efforts with the Fédération Française du Prêt-à- Porter Féminin, to create a ‟guarantee fund”, which provides financial guarantees to young designers who are asking banks for loans, as well as a ‟refundable advance fund”, which provides short-term financing up to Euros 100,000 per designer.
In England, the launch in March 2013 of Creative Industry Finance, an Arts Council England initiative offering business development support and access to finance for creative industry enterprises, may prove a useful tool to accelerate the growth of English emerging luxury companies in the future.
Finally, NEWGEN, set up by the British Fashion Council (‟BFC”), offers catwalk designers financial support towards their show costs and the opportunity to use the BFC Catwalk Show Space. NEWGEN has successfully supported designers such as Christopher Kane, Mary Katrantzou and Meadham Kirchhoff. Fashion Fringe, founded in 2003 by Colin McDowell and IMG Fashion, also nurtures talents such as Erdem and Fyodor Golan.
Unlocking the brand equity potential of a luxury company is a delicate balance between forefront, as well as cutting-edge innovation and creativity, and rigorous financing and human resources management skills. Finding the right finance partner and financing solutions should be a priority for any luxury company, especially if such enterprise is still quite vulnerable, at the early stages of its development.
[1] Highly concentrated brands on niche products, such as Louis Vuitton Malletier and Rolex, have consistently obtained net profit rates above 35 per cent on sales for more than 20 years.
[2] Jimmy Choo was sold in 2011 by private equity firm TowerBrook Capital Partners LLP to Labelux, the privately held group that owns Bally, for more than GBP500 million.
[3] It is said that private equity fund Permira bought Valentino Fashion Group for Euros2.6 billion in 2007, in order to acquire Hugo Boss, in which Valentino had a 51 percent stake.
[4] Since 2007, La Perla is owned by JH Partners, a consumer- focused private equity firm.
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Fashion business partnerships & investment: IP as a business asset
London fashion law firm Crefovi and Own-it, an institution which offers intellectual property advice for the creative sector, hosted a free webinar on Fashion‟ business partnerships and investment: IP as a business asset”, on 13 February 2013. You will need initial funding to create your first, second or even third collection and set up your business. While family and friends, grants and loans can be a source of financing, don’t underestimate the value of intellectual property – yours and other people’s – in the context of securing funding for your fashion business. We study the available fashion business partnerships & investment, in this webinar.
In this one-hour webinar, we will cover:
the different available funding sources;
your business plan – key considerations;
attracting third party financial investment – and the important role of intellectual property (‟IP”);
other types of investment, e.g. creative partners, who are crucial to your business success, and how you can pay them;
key clauses in partnership or equity finance agreements, and
next steps after you secured funding.
Speaker: Annabelle Gauberti, founding and managing partner of London fashion law firm Crefovi (whose profile is set out below).
The webinar ‟Fashion business partnerships & investment” is moderated by Silvia Baumgart, Own-it Programme manager.
When: 13 February 2013, 12:00 to 13:00 (GMT)
Where: on your computer, by way of webinar
Annabelle Gauberti, founding and managing partner, London fashion law firm Crefovi Annabelle has more than 10 years of experience practising the law of luxury goods and fashion as well as media & entertainment law, both in the United Kingdom and France. Annabelle has set up her own boutique law firm, Crefovi, in order to provide tailored legal advice to the creative industries.
Her clients base includes fashion houses, designers & models, artists, art galleries & museums, musicians, film production companies.
Annabelle’s roster of creative clients appreciate, above all, her ability to understand and solve their legal issues in a timely manner, by providing realistic, customised and effective solutions.
She is steeped in finance and corporate law, and has been involved in many matters, either contentious or non- contentious, relating to intellectual property, trademark litigation, selective distribution, franchising, tax and media & Internet law. Crefovi regularly updates its social media channels, such as Linkedin, Twitter, Instagram, YouTube and Facebook. Check our latest news there!
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