Inside Carlyle’s billion-dollar bet on Supreme

Most clothing retailers follow a similar strategy. Open a store, whether brick-and-mortar or online. Sell your wares. Make money. Then use that money to expand, selling more and more of your apparel and making more and more money in the typical upward spiral of capitalist success.

In recent years, however, many private equity firms have had bad experiences with such retailers. True Religion, The Limited and Payless Shoesource were among the traditional PE-backed clothing companies to enter bankruptcy in 2017. The collapses of other big-box retailers—we’re looking at you, Toys R Us—have also shined a light on the difficulties of marrying private equity’s typical cost-cutting strategies to an industry still adjusting to the rise of the internet and its myriad aftereffects. Here’s a look at some of the most high-profile retailers to file for bankruptcy over the past three years:

That series of struggles was surely on the collective mind of The Carlyle Group early last October, when the firm reportedly acquired about 50% of streetwear supplier Supreme in a deal that valued the brand at around $1 billion—an unusual combination of upstart and establishment that proves no matter where you look in our modern economy, private equity is likely lurking.

For the uninitiated, Supreme is a clothing and apparel brand that was founded about a quarter century ago and has since established a cult following across a wide swathe of urbanity ranging from skaters to rappers, from NBA stars including JR Smith to singers like Celine Dion. The company’s shoes, clothing and accessories are among the most sought-after items in popular fashion. Its pervasive logo of white print on a red background is the sort of emerging cultural icon Andy Warhol would have turned into art.

People wear Supreme because it’s cool—for US teens, cooler than any other brand that keeps such a low profile, according to a survey conducted last year by Google:

And a large reason it’s cool is because the company’s inventory is rare. Supreme has turned the act of buying its products into an event. Every week, the company releases a new catalog of items, with the most popular among them selling out in short order—and then quickly popping up on resale sites for several times their original price. These so-called “drops” of merchandise have become can’t-miss events for a certain segment of the clothes-obsessed population.

That scarcity of product carries over into Supreme’s physical presence. The company operates just 11 stores: Two in New York, one in Los Angeles, one in Paris, one in London and six across Japan. Traditionally, that sort of exclusivity has been the domain of high fashion, not streetwear. For comparison’s sake, Versace (which until recently was backed by Blackstone) claims twice that many storefronts in the US alone, while Louis Vuitton (which has ties to private equity firm L Catterton) operates dozens of US locations.

Considering Supreme’s sway among teenagers, it’s likely a large percentage of the company’s customers have never even heard of Carlyle. But the firm is no stranger to investing in fashion.

Dating back to the start of the current decade, more than 10% of Carlyle’s overall investments have occurred in the apparel and accessories space, per the PitchBook Platform. And while Supreme is a unique company, some of Carlyle’s other targets operate in the same market of selling high-end goods to young consumers, such as Golden Goose Deluxe Brand, an Italian maker of sneakers that can retail for several hundred dollars a pair.

Overall, private equity investment in the US apparel sector has been trending down in recent years. But 2018 looks more promising:

Investors apparently haven’t been scared off by an acceleration of PE-backed bankruptcies within the apparel industry. While 2017 brought a new decade-low in distressed exits for PE-backed companies as a whole, more than a quarter of such bankruptcies that did occur involved companies in the retail and apparel sectors.

It’s a clear fact that many established businesses in the space are struggling. Which brings us back to why a firm in the decidedly uncool realm of private equity would pursue a brand that exists at the intersection of fashion, music, sports and pop culture.

By backing an apparel company that does things differently, Carlyle is hoping to find a different result.