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Designers have a new set of eyes analyzing their wares this season: investment bankers, private equity funds and their silent partners.
Nudging themselves between the hordes of buyers, editors, celebrities and socialites are a growing crop of investors prowling for acquisitions in the designer world. The investors are eyeing companies with sales of between $2 million and $100 million that have the potential to grow further — and those on the prospect list include the likes of Anna Sui, Catherine Malandrino, Hussein Chalayan and Phoebe Philo.
The potential buyers include investment funds and private equity firms such as the recently formed TSM Capital, founded by industry veteran Marvin Traub along with Mortimer Singer and Aslaug Magnusdottir, and The Atelier Fund, which was launched this year by Marty Wikstrom and Dawn Mello.
Then there are strategic players such as NRDC Equity Partners, owner of Lord & Taylor, which has snapped up a number of designers; Renzo Rosso’s Only the Brave Srl, owner of Martin Margiela and Sophia Kokosalaki; Fast Retailing Co. Ltd., owner of Theory, Helmut Lang and Uniqlo, which recently said it has set aside $3.5 billion for overseas acquisitions, and Li & Fung USA, which bought some of the moderate brands being sold by Liz Claiborne Inc. Last month, Li & Fung acquired vendor Regatta Pacific Alliance, which provides Simply Vera by Vera Wang, Daisy Fuentes, Lagerfeld-Karl Lagerfeld, Metro 7, Nicole Miller, Todd Smith and other private label collections for retailers such as Kohl’s Corp., Wal-Mart Stores Inc., J.C. Penney Co. Inc. and Charming Shoppes Inc., and said it planned to use Regatta as a base to make further purchases.
For foreign groups like Istithmar, which this year beat out Fast Retailing to buy Barneys New York, or even Only the Brave, now is the perfect time to make an acquisition of a U.S. designer or retailer, given the weakness of the dollar.
The investors have trained their sights on designers who have the potential to be marketed and developed as a global brand. Driving their interest is a shift from bigger “megadeals” to smaller-sized transactions, financial sources said. Given recent turmoil in the credit markets, the pace of mergers and acquisitions activity has slowed. According to Dealogic, year-to-date M&A deal volume in the general retail sector is down 7.8 percent to $38 billion from $42.1 billion last year.
Instead of sizeable, multibillion-dollar deals, the industry may see more transactions such as NRDC’s recent majority stake in Peter Som. But don’t hold your breath waiting for deals to happen — investors eyeing this segment are cautious.
Joey Gabbay, president of private equity fund Bluestar Alliance, said it is important for him to be at the shows. Gabbay established the Bluestar Alliance fund in January with Ralph Gindi for the purpose of acquiring brands. Bluestar also owns Wellington Capital Group, of which Gabbay is president. Wellington last year bought women’s sportswear brand Harvé Benard.
Gabbay said he attends the New York shows, but is not necessarily there prospecting for future acquisitions. “We look for design direction and can get ideas from the shows,” Gindi said.
Bluestar Alliance’s most recent acquisition was men’s wear designer Ron Chereskin Studio Inc. for an undisclosed sum. Bluestar is said to be in talks to buy two other brands, a men’s wear label and one that does both women’s and men’s wear.
Regarding the criteria that the private equity investors have for fashion firms, William Susman, chief operating officer of Financo Inc., said it is broad. “Number one is that the [target] must have substantial revenue and volumes that have grown to a solid level and are trending upwards,” Susman explained. “They also need a good infrastructure and support staff behind their designers, and good distribution behind the brand.”
Susman quickly added it doesn’t matter what size the company is, but it has to be profitable. Susman said companies are simply looking for ways to better differentiate themselves in a crowded market.
“There is always the need for good design,” Susman said, “but this is the first time in a long time that big retailers are valuing good design.”
Traub and Magnusdottir said TSM expects an investment range of between $5 million and $20 million in companies that are either profitable or break even, and with minimum revenues of $5 million. The firm will raise capital from silent investors, from family funds to private banks, on a deal-by-deal basis.
“Over the next three years, we are looking to invest in five to 10 really good brands,” Magnusdottir said.
Because of the firm’s diverse group of investors, TSM will develop business plans that assume exit in three to five years. Magnusdottir said that, because TSM’s investments will be in fledgling companies, she sees TSM exiting the majority of its purchases through trade sales or traditional private equity buyout deals — though she did not rule out the possibility of future initial public offerings.
Late last month, TSM took a stake in London-based Matthew Williamson Holdings Ltd., a deal in partnership with investment firm Aronsson Group, which is headed by chairman Jeffry Aronsson. TSM is working on two other transactions with U.S.-based companies and expects to close the deals within the next six months. TSM is the investment arm of Iceland’s Baugur Group, which owns U.K. fashion brands such as PPQ and All Saints, as well as the British department store chain House of Fraser.
So far, Magnusdottir said TSM has seen the greatest opportunities for investment in major fashion cities such as New York, Los Angeles, Paris and London. But TSM is looking globally. Magnusdottir points to markets such as India — where the women’s accessories market has exploded as burka-wearing women look for ways to express themselves through fashion.
TSM did not disclose how much or what stake constituted its investment in Williamson, but Traub did take a seat on the company’s board.
Aronsson summed up how investors tend to look at designers in the market. He told WWD that he’s been “aware of Matthew Williamson over the years, but it has been at a distance.” Aronsson also offered a glimpse of what an investor seeks in a designer.
“Only recently have my team and I had the opportunity, together, to become well acquainted with and to appreciate it as an exquisite brand rooted in Matthew’s design artistry,” Aronsson explained. “We became even more interested after having the opportunity to get to know Matthew and [ceo] Joseph [Velosa] and how they work off of each other. Together, Matthew and Joseph possess that rare and all-so-important balanced blend of art and science. The results of this balance and their bottom-line focus is reflected in another rarity: a profitable, designer-driven business poised for growth on a global basis.”
Aronsson said his firm “believes that the fashion/luxury/branded retail space offers great opportunities for those who truly understand, from an operating perspective, how businesses in this space work.” He said, coupled with a bottom-line focus, “these attributes are necessary for successful investments in this sector.”
On the venture capital side of the financial markets, sources said venture capital money is not making its way specifically to the fashion industry. However, Theresia Gouw Ranzetta, general partner at venture capital firm Accel Partners, said there is a “big trend” of investment in women-focused online content.
The recent swoon coincides with investors’ realizations that the bulk of advertising dollars are targeted to women, and that marketers need new online outlets to grab women’s attention — outside the largely dominated male content, such as sports and technology, that now dominates the Web.
Ranzetta points to Glam Media Inc., which has raised just less than $30 million in two venture financing rounds and an angel round of funding from big venture names such as Accel, DAG Ventures and Draper Fisher Jurvetson, among others. Glam Media owns and operates glam.com and the Glam Publisher Network of more than 350 Web sites, blogs and magazines, along with syndicated content.
Meanwhile, industry sources said now is the “perfect time” for strategic players to gain the upper hand over the leveraged buyout specialists. One banker, who requested anonymity, said there are always strategic buyers for good brands, such as those from the Liz Claiborne portfolio now on the auction block. Recent examples include that the $775 million VF Corp. paid for denim firm Seven For All Mankind and the $110 million deal for Lucy Activewear, both announced July 25.
The debt financing that was once available for LBOs has now disappeared. Investors are skittish about high-yield debt, the typical syndicate used by banks for bridge loans to fund the deals. Michael Kollender, an investment banker at Stifel Nicolaus, believes retail and apparel will continue to be an attractive sector for buyers. And, while he sees private equity jumping in when the opportunity is right — as evidenced by Sun Capital’s $543 million bid last week for Kellwood Co. — he also believes strategic players could gain the upper hand in the current environment.
“I don’t think LBOs are permanently dead, just that the large transactions will slow,” Kollender said. “This is where the strategics can come in because they can finance deals with lines of equity. I see more activity in the middle market, where debt capital is still available….The middle market is financed more with commercial banks, and they still have capital to lend out.”