Specialists in apparel M&A at Kroll expect activity to slow in the fourth quarter, but see bright spots even now and expect the market to bounce back in 2023. Here are some reasons why.

“There’s still a lot of capital to be deployed,” says Brian Little, a Kroll managing director and one of the authors of the firm’s recent report on the apparel industry. “PE firms are sitting on the sidelines, but strategic investors are looking at solid valuations in high-growth brands.” Kroll a provider of services and digital products for valuation, governance, risk and transparency

The biggest development over the past 12 months has been the growth of input costs, Little says. “The no’s come a lot quicker,” he says. “The risk is too great.” He expects PE activity to come back as the funds begin to open up again and identify brands with solid growth potential.

Luxury brands have been able to buck the trend in the meantime because they are able to pass on higher costs to the consumer. Spending by the “nearly affluent” has declined, but the affluent consumer has taken up the slack, according to the Kroll report.

Luxury lingerie, for instance, has proven to be resilient. Cosabella, a family-owned Italian firm with a big market in the U.S. has benefited from having its own sourcing.

“They are vertically integrated,” notes Little, “so they were able to avoid supply chain disruptions.”

Little worked with the family owners on the acquisition by Swiss-based Calida Group, and he cites it as an example of a linkup that can lead to geographic expansion. Calida can enter the U.S. market through Cosabella’s well established presence, while the Italian firm can tap into Calida’s European market and beyond.

Another example in luxury lingerie is Victoria Secret’s acquisition of a minority stake in For Love and Lemons. That combination enables Lemons to benefit from Victoria Secret’s powerful marketing channels while delivering a younger market segment to the older firm.

Apparel industry trends in general bode for a comeback in the next 12 to 24 months. “There’s more M&A just from the sheer number of players,” Little says. “I’m always waiting for the next $50-million brand I never heard of.”

Darrell Delamaide