LF: DEEP POCKETS
Byline: Sidney Rutberg
NEW YORK — While most venture-capital firms look for high-tech investments, at least one deep-pocketed firm actually seeks out apparel firms for its investments.
That company is LF International Inc., based in San Francisco. Its most recent foray into the industry was a participation with an investment group that is injecting $15 million in new capital into Danskin Inc., the struggling dancewear and legwear company. Michael Hsieh, president of LF International, said in a telephone interview from his San Francisco office that he could not disclose the specific amount his fund is investing but said it was “a significant player in the deal.” He added that he will serve on Danskin’s board.
LF International is an affiliate of Li & Fung Ltd., the largest apparel buying agency in Hong Kong. The investment fund LF manages is backed by Li & Fung, the Agnelli family of Italy and the Oppenheimer diamond and gold mining family of South Africa.
So far, the investment fund has been very profitable. Since its inception in 1986, it has earned an annual return of 128 percent, and one of its deals provided a return of 340 times the amount invested.
“The fund has about $55 million for investment, but we could raise more if we needed it,” said Hsieh. “We like to work with investments of about $1 million to $5 million, but we could easily go as high as $30 million or even $50 million.”
But why would a venture-capital company want to bother with the apparel business rather than run with the fast-growth high-tech companies?
Part of the answer lies in the basic business of Li & Fung. In addition to investing new capital in apparel companies, LF works out agency agreements for Li & Fung to provide sourcing for these companies.
“We can source globally through 33 offices in 23 countries, including all over Asia, Turkey, Egypt, Portugal, Honduras and other areas,” Hsieh said. Li & Fung doesn’t own any factories, but it has the expertise to find the best factories for the particular product being manufactured, he added.
“We go out and find the right factories. We’re not locked into any particular country.”
Li & Fung is publicly traded in Hong Kong. Last year it had sales of about $1,600,000,000 U.S. ($12,500,000,000 Hong Kong) at current exchange rates). It earned about $39 million U.S. ($300 million Hong Kong). Its sourcing clients include The Limited, Warner Bros. Studio Stores, Gymboree and Reebok. Hsieh said investments through LF International in the U.S. account for only about 5 percent of Li & Fung’s revenues.
“The seed of the venture-capital idea can be traced to our relationship with Gap. In the Seventies and the Eighties Li & Fung was the exclusive agent for Gap. After watching the chain’s tremendous growth, we realized that we should have made an investment in the company. It was that experience that gave birth to the idea for a venture-capital company,” Hsieh recalled.
In investing in apparel companies, Hsieh said his company wants only a minority interest. “We don’t want control. We want the entrepreneurs who founded the company to continue to run it. After all, they’re the ones with the design and marketing talent.”
Basically, LF International is looking for companies with sales of at least $3 million, a need for overseas sourcing and owners who want to continue with the business and maintain control.
Among LF International apparel investments are Santana Ltd., which designs and markets young men’s wear under the Santana, Brut and HIS labels, and Wilke Rodriguez, which designs and markets upscale men’s sportswear to retailers such as Saks Fifth Avenue, Bloomingdale’s, Neiman Marcus and Macy’s.
One startlingly successful investment, which Hsieh called a “home run,” was in Cyrk Inc., a T-shirt printer based in Gloucester, Mass., where volume went from $20 million to $400 million in three years.
“We invested in the company in April 1990 and realized that its strength was in graphic design, creating designs for corporate logos and other corporate promotions,” Hsieh recalled. “Instead of just printing T-shirts the company applied its designs to all sorts of merchandise — watches, caps, umbrellas. It now designs promotional programs for such corporations as Phillip Morris, Mars and NationsBank.”
LF International got out of Cyrk when the company went private in 1993; LF earned $67 million from an investment of $200,000, Hsieh said.
Hsieh, 39, has been president of LF International since 1986. He was born in Hong Kong but came to the U.S. at the age of 10 and grew up in White Plains, N.Y.
He graduated from Harvard College and went to work in corporate finance at Merrill Lynch for two years. He then went to work for Sun Hung Kai, a Hong Kong brokerage firm, for another two years.
Then in l982 he returned to Harvard, this time to the business school. After receiving his MBA, he joined R.H. Chappell & Co., a San Francisco-based venture-capital firm. In July of 1986 he met Victor Fung, chairman of Li & Fung, and became president of the LF International investment firm.