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Roundtable: The Money Tree Grows

There’s a lot of money out there. <BR><BR>In fact, retail and fashion firms in general continue to be well capitalized, while the options and availability for those needing access to capital have never been better. <BR><BR>That’s one...

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There’s a lot of money out there.

In fact, retail and fashion firms in general continue to be well capitalized, while the options and availability for those needing access to capital have never been better.

That’s one surprising conclusion to come from a panel discussion of financial experts who explored issues facing start-ups, IPOs and the challenge of finding the right financial partner. Participants included Norman W. Alpert, managing director at Vestar Capital Markets; Bill Contente, managing director of Equity Capital Markets of JPMorgan Securities Inc., and Susan O. Posen, vice chairman and chief executive officer of House of Z, which produces the Zac Posen collection. Philip F. Bleser, senior vice president and group executive for Mid-Corporate Banking at J.P. Morgan Chase & Co., moderated the panel.

Bleser described the balance sheets of many fashion and retail firms as “incredibly well capitalized,” and noted that capital availability in the marketplace has “grown dramatically even year-over-year.”

He said, “Inflows into equity mutual funds in 2002 were $12 billion. Last year, it was $100 billion to $106 billion. This year, through September, it’s been $151 billion, and that’s gotta be put to work.”

On the merger and acquisition front, there have been 35 so far in the fashion and retail sector. “That’s the same as it was last year, and we still have a quarter to go….Last year we thought this is as good as it gets and it clearly has gotten better,” Bleser told the audience.

As for how that money gets put to work, one option is investing in fashion and retail firms, according to the panelists.

“We’ve done a fair amount in this sector,’’ Alpert said. “Some people question our sanity at times, but it has been working out quite well dating back to deals in the mid-1980s.”

Vestar’s investments include Cluett American, maker of Gold Toe socks, and Sun Apparel, which held the Polo Jeans Co. license. More recently, Vestar helped executives at St. John Knits take the company private.

Alpert emphasized that a constant theme in his firms’ success has been a focus on brands.

“We have been very brand-centric, and only work in those transactions where we can back a management team, where we can establish a partnership [and] work together,” he said.

Alpert explained that Vestar focuses on undermanaged brands that have the potential for channel expansion and innovation. He said a key factor common among successful businesses is their knowledge of who they are and who they’re not. His firm manages a pool of capital that is $2.5 billion, and can invest as little as $50 million or as much as $500 million.

Too much money available chasing the same deals, however, isn’t a good thing for firms such as Vestar.

“We go where others fear to tread,’’ Alpert said. “The availability of capital is not a good thing in our view. We’d rather be in an environment where it’s hard to raise money because it’s easier for us.”

Highlighting the difficulties in finding the right investment, Alpert disclosed that the company worked on three major transactions this year, with none being completed. Still, the analysis helped Vestar learn more about the sector. However, an increasing problem is that “more [financial] firms are looking at [retail and apparel],” and increased competition has resulted in prices being bid up.

JP Morgan’s Contente said he’s noticed an increase in the initial public offering market.

“So far, 173 companies have gone public this year,’’ he said. “They raised about $35 billion dollars, and it’s the best year since 2001. The IPO pipeline has come back to life. That’s the good news and the other good news is that deals that have come to the market have done quite well.”

Contente noted that an IPO can be a source of needed cash when a firm wants to expand. He explained that while there may be cheaper sources of cash in the debt markets, sometimes accessing the public equity markets is the best course because it often provides the most investment dollars.

“We like to say you go to the market when you can, not when you need to,’’ Contente said. “Often our advice on when to go public is also colored by when is the right time to maximize their value.”

He also noted that for the first time in 10 years he’s seen a larger percentage — 40 percent to 42 percent — of the IPOs have had a secondary selling in the deal.

“I’ve done IPOs this year that have been 100 percent secondary,’’ Contente said. “I’ve had ceo’s sell in three or four deals….It’s a seller’s market in many respects and the buy side so far has been there. It’s a $150 billion of cash that has to be put to work. The deals that have come out have performed fairly well, certainly have beaten the S&P or Dow Jones performance.”

Posen, who is helping her son, designer Zac Posen, build the House of Z, commented on the difficulties of a start-up.

“We were building the company on air and with interns,’’ she said. “We were seriously undercapitalized. Expenses had to be very tightly controlled, which we learned from the dot-coms. We found it difficult to get credit cards, and getting the telephone hooked up with no credit was not an easy feat.”

But the ceo also has some key advice for entrepreneurs: “I think if you ask you get, so a lot of the support and information was there for us.”

That was three years ago and now that the brand is starting to gain momentum, the firm also saw a need for capital in order to grow. First on the agenda was developing an executive team that could build the business, and then looking for well-heeled angel investors.

For House of Z, one key investor has been Sean “P. Diddy’’ Combs. “We found someone who believed [and] let us grow at the pace we think we need to, which is a measured one,” the ceo said.

As for avenues of capitalization that firms, including start-ups, might want to pursue down the road, Contente cautioned that sometimes going public isn’t the right option, a point that was also stressed by Vestar’s Alpert. A key issue for public firms is that they become “slaves” to the quarterly numbers, which is simply the wrong strategy for some fashion and retail companies that require long-term development.

“Once you establish the benchmark, and that is the downside of going public, then people ask you to live up to those expectations. As you think about going public, it’s a tough business to manage. It’s seasonal, it’s subject to, in some respects, consumer tastes. And once you miss that benchmark that you’ve established for the market, it’s a pretty swift and brutal response,” Contente said.

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