Brands in the Crosshairs: Private Equity Sets Sights on Fashion

Dealmaking is heating up in the industry. And while designers are very familiar with many of the would-be buyers — including Bernard Arnault, François-Henri Pinault and Johann Rupert — there’s another group out there that’s extremely well-funded and can’t be ignored. So designers not only need to know those three luxury titans, but also Stephen Schwarzman, John Danhakl, David Dominik and lots, lots more.

Private equity players have a record $1.2 trillion in “dry powder,” or committed capital that is yet to be invested, according to research firm Preqin. That’s $139 billion more than the big-money investors had at their previous high-water mark in 2008.

The successes of not just the Michael Kors and Tory Burches of the world, but also of the Warby Parkers, Nasty Gals and Rent the Runways have whetted the appetites of big-money investors looking for exponential growth.

“Warby Parker’s become a kind of verb,” said John Howard, chief executive officer of Irving Place Capital, referring to the attention the company’s direct-to-consumer model has garnered in investment circles.

“The idea of getting rid of the middle man and getting right to the consumer is profound,” Howard said.

And tech is only becoming more intertwined with fashion, which is gaining currency in Silicon Valley.

Norwest Venture Partners has found its way to fashion brands via technology and e-commerce and has invested in Gilt Groupe, ModCloth and Kendra Scott. Sonya Brown, a general partner at Norwest, said, “The thing about e-commerce is we want to find areas where we don’t think Amazon can play in a big way, so areas that aren’t going to get commoditized by Amazon. We view fashion as one of those.”

Norwest is looking at omnichannel potential and at offline brands that can expand digitally and brands that can project their power in stores and online.

Strong brands are having a heyday.

That’s because brands increasingly have to play in more than one venue and resonate in stores, online, in the blogosphere and beyond.

And although many might think of investors as weighed down with spreadsheets, private equity companies are often very attuned to brands, keenly aware for instance, that logos have lost their luster of late.

“You’ve got to figure out another way to get that brand connectivity because people also want to have their own style,” said John Coyle, head of the New York office of Permira, which has investments in Hugo Boss and Dr. Martens and was said at one point to be looking at investing in Roberto Cavalli. “Individualism is important and that’s tough to do if you’ve got a big logo stamped on it.”

Coyle said Permira is “selectively bullish” given the never-sure economic outlook.

“If we get it wrong, we want to get it wrong with companies that are going to withstand the recession,” he said. “You have to be a bit more selective in what you buy in a market like today, which is more expensive than it was a couple years ago.”

Steven Collins, managing director at Advent International, which just invested in Lululemon Athletica Inc. for the second time, said the action in fashion is on the two ends of the price spectrum.

“You want to be somewhere on the higher side or the lower side,” Collins said. “It may be more difficult to be in the middle.”

He attributed part of that to the omnichannel trend.

“Being able to sell things online as well as in your stores, maybe that trend isn’t great for some of the midlevel guys that have a ton of assets spread out all across the country,” he said.

But investing on the high end, in particular, brings greater fashion risk and the need for expertise.

Jason Wu last week sold a controlling stake in his firm to InterLuxe, a new investment house chaired by factor Gary Wassner and backed by Lee Equity. This brings together Lee’s money as well as the expertise of Allen Questrom, who works with the private equity firm, and Wassner’s insight as a financier to many New York designers.

And Wu isn’t a one-off for InterLuxe, which is looking to build a portfolio. Wassner said the venture started off with a list of hundreds of brands and is being whittled down to a small group of potential investment partners. “I’m at fashion week and I’m looking at every brand,” he said.

He has plenty of company.

Saks Fifth Avenue veteran Ron Frasch, who’s now an operating partner at Castanea Partners, is also at New York Fashion Week — and he’s very much keeping his eyes peeled for potential deals. Frasch last week made his first deal as part of the fund when Castanea invested in Aurora Brands, which owns Jay Strongwater and MacKenzie-Childs.

“Luxury is a good place to be,” Frasch said. “People want the finer things in life. Some [brands] have a lot of permission to expand the products they design. It’s a big world and we want to play with brands that could be distributed globally.”

Frasch said Castanea is betting on businesses and talent.

“We have to be involved and engaged,” he said. “We have no intention of running it. That’s why we’re investing in it. We believe in the team.”

Glen Senk, who is ceo of Front Row Partners, an investment firm tied to Berkshire Partners, is also looking for expertise and individuality.

“I am always attracted to people who have their own North Star,” said Senk, who has served as ceo of David Yurman and Urban Outfitters Inc. “I’m attracted to people who are smart. There’s more complexity today than there probably ever has been. You have to have expertise across so many functions in the business, you have to understand finances, supply, design, marketing, distribution, e-commerce, digital….”

Joseph Lamastra, ceo of Sandbridge Capital, said he counts on advisers such as former Gucci Group ceo Domenico De Sole and Tommy Hilfiger to help find investments. Sandbridge has been active in the designer space, investing in the Karl Lagerfeld brand and Derek Lam, but Lamastra said the company is also looking at the broader consumer world and has invested in Bonobos.

“We are looking for companies that we believe are in a growth mode or on the verge of a growth mode and need capital,” said Lamastra.

Investors in general have become more comfortable with the vicissitudes of the industry.

“There is an increasing appetite for fashion risk, in part because some folks have experienced success in the category,” said Andrew Crawford, who heads General Atlantic’s retail and consumer business as managing director. “There’s the natural churn of a few new entrants and a few of the established players not being as active.”

General Atlantic, which already has investments in Tory Burch and Gilt Groupe, is ramping up, having brought Crawford on board this year to expand in the consumer and retail area. On average, General Atlantic holds on to an investment for six to seven years, longer than is typical for many private equity companies.

“We typically invest $50 million to $600 million of equity — and can invest in a deep minority position or buy 100 percent of a company,” he said.

More investors are open to having something less than control of a company.

Douglas Hand, an attorney at Hand Baldachin Amburgey with many fashion clients, said he advises designers to “be mindful of the investor’s anticipated exit.”

“Understand that institutional venture and private equity investors have an investment horizon and are beholden to their limited partners to execute on it — meaning, in most cases, they will look to grow the value of the business over a three- to five-year period to prepare it for a sale or IPO where they get a return on their original investment,” he said. “This may or may not be consistent with a founder’s or designer’s long-term goals.”

A big return is definitely going to be among the investor’s long-term goals. www.wwd.com