By  on May 18, 2007

NEW YORK — Thirty-one floors above Fifth Avenue, and a stone's throw from a row of tony retailers — including Bergdorf Goodman and Henri Bendel — the view from TSG Consumer Partners' new Manhattan headquarters offers a glittering reminder of the fund's mission: to court luxury brands.

The San Francisco-based private equity firm established the office here, led by managing director Alexander Panos, to continue to scout out prestige beauty brands, and to begin to expand its focus to apparel, footwear, accessories and specialty retail companies.

"These categories share many of the things we look for: high margins, great entrepreneurs and categories that welcome new products, which offer luxury and functionality," said Panos, speaking from the firm's office, located at 712 Fifth Avenue. "They are also categories where working capital challenges exist and where having a strong financial partner is key."

In addition to Panos, the team here includes managing director Yasser Toor, who also transferred from the San Francisco office, and Melis Kahya, an associate who previously was an investment banking analyst at J.P. Morgan, specializing in the consumer, retail and apparel sectors.

In beauty, the firm has invested in Smashbox Cosmetics, N.V. Perricone M.D., Alterna Professional Hair Care and PureOlogy, a salon line for color-treated hair that was purchased by L'Oréal last week. The firm also recently sold vitaminwater and Voss water, and expects to close a deal for Smart Balance, maker of trans fat-free spreads, shortly.

"We have four great [beauty] brands that lead us to consider other luxury brands," said Panos, adding that while there are other beauty partnerships in the pipeline the firm is opting for a cautious and deliberate pace to expansion.

Panos said the firm generally targets companies with more than $50 million in manufacturer sales, where the founder is at the helm, backed by a strong management team. Also essential, he noted, is a company that does business in high-growth and profitable retail channels. For beauty brands, those channels include the Internet, television and specialty stores.

"The Federated-May merger has been challenging for many companies because of store closures, so specialty retail has been a big opportunity, as have HSN and QVC," said Panos. "For apparel, we are looking for companies that are profitable and growing, and have the opportunity to have their own stores and to license into multiple categories."The firm's entrenchment in luxury also relies on retailers' feedback. "Retailers have been great partners in sharing which brands they love and which brands they can get behind…they are excited to have us involved because we bring wherewithal to companies they do business with," he said. "A new company will sometimes have a lot of initial success, but then come the realities of how to provide a couple hundred retail doors with education and training and logistics. We can provide those resources immediately."

For instance, TSG invested in N.V. Perricone M.D. a year ago, and recruited Shashi Batra as president from the Estée Lauder Cos. Batra said he became acquainted with Panos about five years ago while at Sephora, which like TSG is headquartered in San Francisco.

"It's a company that when we came in exactly a year ago needed our help," said Panos. "It had so much opportunity ahead of it, but as a small company it had challenges. But the fundamentals were there, and the products are backed with science and technology."

Referring to TSG's involvement, Batra said, "In a very short time, we have almost doubled our field sales force [to 25] as a direct result of our partnership with TSG." He added that the private equity firm has also provided Perricone with marketing resources, which he hinted will be visible soon. Perricone has yet to launch a full scale print or television advertising campaign. Also this year, the dermatologist-backed line plans to introduce three products, including Advanced Face Firming Activator, which is currently the best-selling item in the line, and Ceramic Skin Smoother, a treatment product that can be worn alone or with foundation that launched in Sephora this month. A third product will be revealed in September.

"TSG brings a fresh perspective of what a business model can be. It sees very clearly what this industry has evolved into," said Batra. "It doesn't focus on the past. The firm sees now and the future. It's simply looking for dynamic brands that take advantage of the new shopping patterns of consumers."

In Panos' view, TSG is built like a strategy consulting firm, which relies on dynamic company founders, like Nicholas Perricone, M.D., Jim Markham of PureOlogy and Smashbox's Dean and Davis Factor."We are not looking for our returns to come from financial engineering. We are looking for growth and strategic value," said Panos, adding that, as a group, TSG's partner companies grew an average of over 40 percent in net sales in 2006. "We think about what is the snapshot of a company five years down the road and that's the company we focus on building," he said. The strategy includes determining appropriate products, positioning, the management team and retail channels.

Panos noted that private equity firms tend to hold onto their investments for three to five to years. Thus far, TSG's timelines have ranged from one year, in the case of Voss, to over five years. "When you invest for the long-term, the irony is that [suitors] tend to come calling in the short term," he said.

Panos is quick to point out that these companies have one thing in common: they are all competing with industry behemoths. "We like to bet on the little guys. If L'Oréal is paying attention to PureOlogy we must be doing something right."

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