Lazy Leverage and a Covenant Breach
An Anatomy of PE's Playbook Failure
Last week, I wrote about PE's 'Illusion of Health'. And asked if the industry's standard methodology has reached its limits. Unfortunately, this week, Valentino verified my point.
News broke in Bloomberg with the article “Valentino in Talks With Banks as Luxury Drop Prompts Debt Breach” that the Kering and PE-owned Mayhoola for Investments' brand has breached its debt covenants.
This isn't just an industry downturn; it's a very preventable corporate heart attack. The symptoms started years earlier. Lazy leverage has created unhealthy companies, and the patients are now being rushed into the ER on stretchers at an increasing pace.
Has the industry's standard methodology reached its limits? You decide.
The official narrative may blame the markets, but that's taking a painkiller for a deeper, undiagnosed disease. The real cause? A systemic operational failure. My Organisational CT Scan reveals a catastrophic, decentralised "back-stage" reality where the absolute basics of a luxury transaction are failing.
The unintended consequences?
A broken returns process, often described as a "scam".
Unresponsive, rude, and incompetent support.
Quality defects inconsistent with luxury pricing.
Extreme delays forcing customer chargebacks.
Lost items, wrong orders, and delivery chaos.
The Operational Causation
These interconnected operational erosions are what have created the dangerous financial symptoms at Valentino today. Using new rulers, a diagnostic would have revealed a different path to:
Reduce the debt-to-EBITDA ratio from a problematic 4.35x down to a healthy 2.48x, placing Valentino well within any conventional covenant limit.
Make the full buyout by Kering more urgent, rather than delaying it until 2028/2029.
Add over €3.7 billion in Enterprise Value in the process.
Let's be clear: this isn't just an asset failure; it's a failure of the PE playbook. You can't financially engineer your way out of the causal inefficiencies you can't see, touch or measure '"customer emotions". Valentino is simply the latest public example.
If an 'outsider' like me can find an asset's root causes and specific actions to avert a default, why can't asset owners (PEs and GPs)? You have incredible access to the world's best tools, models, and resources. Professor Ludovic Phalippou at Saïd Business School, University of Oxford, might have some tools and views on this ;-)
Diagnostic Alpha is a data-driven exposé of the gap where the perception of value has become detached from the reality of creating it. The "Precision Playbook" in the first comment below is for those leaders who know the greatest value is found not in the light, but in the shadows.
P.S. To the current Valentino owners: Your official strategy focuses on the "front-stage". The real unseen crisis is in your "back-stage" execution. My findings from 2017 are still on the table.
The full story and the methodology used to see this crisis coming are in my guide: "A PRECISION PLAYBOOK FOR AN AGE OF DIAGNOSTIC ALPHA." It outlines the five steps that move you beyond the streetlight and find verifiable value. Download your free copy.
