Looking for a hot retail deal space for 2012? Look no further than the teen and youth lifestyle segment.

While at first glance the sector may look extremely competitive, it in fact presents attractive deal and investment dynamics and opportunities. For many companies, the idea of operating in a private setting is quite appealing, since it provides the possibility for a turnaround without the constant short-term scrutiny of Wall Street. It also allows a rapidly growing company to accelerate its growth by deploying private capital more aggressively. For investors, the challenge is to find the company or companies that promise the right risk-adjusted potential returns.

Speaking of investing in the teen specialty retail segment brings to mind an old Rolling Stones song (yes, today’s teens still listen to The Stones): “You can’t always get what you want … but if you try sometimes, you just might find you get what you need.” So how should potential investors think about this space?

Let’s get the bad news out of the way first.

Competition is fierce. Since 2005, per-capita teen apparel retail space (the number of square feet divided by the total population of 15- to 24-year-olds) has grown 20% in the U.S. The total number of teen apparel stores has increased 22%. Fast-fashion retailers like Zara, H&M and Forever 21 have increased store count by more than 200%. And these numbers don’t even include online shopping, which grew from 7% of total teen apparel sales in 2005 to around 15% in 2011. Retailers from Old Navy to Charlotte Russe to Wet Seal continue to evolve their strategies to compete in this environment.

To make matters worse, teens are still reeling from the Great Recession. Their unemployment rate hovers around 23%, up from 15% in the pre-recession days. And teens say they’re spending less. A recent survey of high school students found that fashion spending has dropped an average of $167 since pre-recession periods for middle income teens, and $485 for those in the more upscale ranks. However, the economy has begun to show signs of life, and teens’ likelihood to increase spending as the economy improves is as high as, if not higher than, that of any other consumer group.

The teen space, like high school, is squarely divided between winners and losers. Over the past decade, teens have gradually shifted their spending to fast fashion, trendy action sports brands and youth lifestyle retailers, and away from the more traditional brands.

Given this backdrop, many teen retailers, particularly the more traditional ones, were forced to use uber-aggressive promotional strategies to encourage spending during the 2011 holiday season. It was not uncommon to see price discounts of 30%- to 50%-off entire stores for the weeks leading up to Christmas, with some promotions rising to an unprecedented 70%-off by late December.

Now, the good news. In the midst of what looks like a lot of clouds, there lurk several silver linings that make for interesting deal opportunities. Specifically, this environment creates promising deal opportunities across four different types of segments.

1. Undervalued concepts. Despite the headwinds, several iconic retailers, such as Aéropostale, Abercrombie and Fitch, and American Eagle, will be able to take advantage of the improving retail trends heading into 2012 to substantially improve their performance. They have strong brands, considerable customer loyalty and are well-managed. However, they need to focus more effort on providing a unique consumer proposition in both product and experience, rationalizing their store fleet, and exploiting both omnichannel and international growth — strategies best executed in a private environment away from the gaze of public investors.

2. The youth lifestyle segment. The teen space is a tale of two markets, where retailers like Zumiez and Buckle have stolen share from less differentiated players. While both Zumiez and Buckle are richly valued, thanks to their best-in-class value proposition and unique brands and products, they still have significant growth potential in bricks-and-mortar expansion. Billabong, another rising star, has in its portfolio some of the most sought-after brands in action sports, such as RVCA, Dakine, Nixon and Element, and was recently approached by TPG Capital. However, its core brand has suffered in some regions, but has the attributes needed to regain traction. Again, is this not better completed in a private setting?

3. Hot brands and concepts. There are several smaller concepts and hot brands that have helped fuel the growth of the action sports lifestyle segment and numerous brands that operate in high-growth niche areas such as street and urban. Several smaller private players come to mind, such as Shiekh Shoes, Active Ride, Obey, Shoe Palace, LRG and many others, which, while private, present opportunities for well-capitalized financial and strategic investors.

4. E-commerce and direct-to-consumer concepts. Online retail is especially important for the teen segment and will continue to take share from traditional brick-and-mortar stores. Sites like Karmaloop.com, which combine selling, social media and crowd sourcing, continue to be the model for future success.

Management teams considering a sale or seeking a path to going private need to clearly articulate their value proposition and unique brand story in advance of any deal process. Any interested private equity buyers will also need to understand capabilities and opportunities for growth in an increasingly competitive environment. Retailers and brands that can articulate a clear value proposition and differentiate themselves from competitors will be better insulated from price wars, giving them a better chance of success in both private and public capital markets.

We continue to see a lot of interest by financial sponsors in the teen segment. So while the teen space is competitive, it also presents an opportunity to find pearls and diamonds in 2012 and beyond. So if you have the “moves like Jagger,” and are looking for an attractive reason to take a teen retailer or brand private, look carefully— you just might find what you need.