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What we’ve learnt from the THG rollercoaster: Identifying strong retail investment opportunities

 

Last summer THG was fast becoming a key player in the digital-first ecommerce space, following its acquisition of Cult Beauty in a £275 million deal. Valued at £1.6bn, the goal was to develop THG into the No.1 beauty platform in the world, with Cult Beauty’s private shareholders impressed by THG’s ability to bring “rapid technology and operational advancement, e-commerce innovation and the muscle of scale”.

Yet, fast forward six months and THG finds itself in a very different situation, with share prices dropping as much as 88 per cent compared to its highest point. There have been doubts over its Ingenuity arm – which Cult Beauty was fully integrated into – and this has been deemed one cause of the share price dropping so considerably. The market has also continued to shy away from investing in ‘hyped’ technology firms and its decline has been part and parcel of a wider ‘correction’ to tech stocks worldwide as retail investors back pedal on their love affair with all things digital.

At a time when takeovers of UK companies are on the increase, there is a growing chance that the company will be acquired with interest from private equity companies. It has already rejected multiple offers that have been deemed ‘unacceptable’, and as it looks to improve its corporate governance and improve the transparency around its Ingenuity arm, how can private equity firms ensure they are effectively identifying strong retail investment opportunities?

Today, the importance of tech due diligence permeates all areas of a business to provide an informed assessment for any investment or acquisition deals. Regardless of whether a brand or retailer operates in the digital space, in 2022 all retail companies should be considered and evaluated as tech companies.

A large component of this type of work revolves around the need for good hygiene practices through the due diligence process: the majority of private equity companies looking to retain tech due diligence consultancy do so in order to avoid disaster down the line from an ill-advised purchase, or to add strategic value to a project. The former is all about ensuring that, when a firm is looking to make an acquisition or invest and flip a business, they’re making a good investment: the tech is strong, stable, and reliable, and that it supports the rest of the business in a robust and meaningful way.

Alongside understanding whether there are good hygiene practices, private equity firms should also understand the potential growth opportunities. This is where technology really shines though is in its ability to add value to an investment.  To understand a business and its tech stack is truly an art form in unpicking possibilities. Due to technology’s evolving role and its interplay with other parts of the business, it’s now a critical and core component for any company looking to compete in the digital economy. It therefore should be no surprise that technology is a crucial part of any due diligence work, and holds the power to open up longer-term value creation for investment firms of all sizes.

Rather than evaluating the functionality of a retail business in order to sell on, conducting a full-scale tech audit can highlight strengths, weaknesses, opportunities, and threats within a business and inform where firms can invest wisely to maximise their return on investment. As we continue to see M&A and PE deals surging in the UK, this could become a key differentiator for those looking to move capital but who aren’t ready or willing to offload their assets in the short term.

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