Small Cap M&A activity on the rise, courtesy of mkpress.com

NEW YORK, United States — Just before the madness of fashion week started, I read an interesting study by KTA Capital, an independent investment bank based in New York. The report analyses small-cap market activity for the month of January 2009 globally, as well as in selected national markets.

The first section is not a surprise: “There has been a substantial reduction in the amount of corporate finance activity internationally, not only compared to the same period last year, but also compared to December 2008,” says KTA, which noted a significant drop in the number of M&A transactions. “However, several distinct trends have emerged in specific national markets,” most notably, the United States.

“Despite the decrease in the number of transactions, the total US M&A volume in January 2009 was US$110 billion, greater than the January 2008 volume of US$104 billion and the December 2008 volume of US$35 billion,” says KTA.

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Savigny Luxury Index since Jan 1, 2007, courtesy of Savigny Partners

LONDON, United Kingdom — It’s all been a bit doom and gloom around here for months now, and I’m afraid the latest Savigny Luxury Index (SLI) does not deviate from this theme. Valuation multiples have dropped from a peak of 13x EBITDA (operating profit) in June 2007 to 8.5x EBITDA just before Christmas, effectively wiping billions off of the market capitalisation of luxury stocks.

But there is still some good news for so-called ‘AAA Luxury Brands’ in the throes of a synchronised economic downturn.

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Apax Partners, the London-based private equity firm, has abandoned its bid to take a stake in Escada AG, the embattled German fashion company.  Citing deteriorating market conditions, Apax stated that

“the recent evolution of the stock price and the weakness of the international financial market do not give a basis for pursuing the project.”

This is absolutely the right decision. Not only has Escada become somewhat of an industry basket-case in recent years, on Wednesday the company also revised its earnings projections for year ending October 31 downwards yet again. EBITDA margins are  expected to fall by about 25% compared to 2007. The company cited recessionary conditions in the USA and other key markets as the reason behind the revisions. Escada’s shares fell by 10.8% on Wednesday to 14.35 euros.

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Just the other day we were commenting on the importance of a good fit between a brand, its management and the underlying creative talent.

Today’s WWD says that Tanner Krolle, the prestigious English leather goods brand is back on the block, after a falling-out between Albion Investors and its second creative and management team for Tanner Krolle. It’s further proof that investing in fashion and luxury is not for the faint-of-heart or the short-of-luxury-experience (Albion’s other investments include companies involved with shelter design and manufacturing, home healthcare services, solid waste services, and crude oil transportation services).

In the past year, the design aesthetic and creative vision of Tanner Krolle had been beautifully refined by Manuela Morin as a discreet luxury brand (perhaps  it is not surprising that she has experience at Bottega Veneta.)

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The fourth article in our BoF Basics series for emerging designers has been a long time coming. We have been receiving emails every other day asking when the next article would be published. So, here it is, and  thank you for your patience.

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So you’ve done it. You’ve cobbled together some financing from family and friends or squeezed a loan out of your bank manager. If you’re a little farther along, perhaps you have managed to raise an injection of capital that will help take your business to the next level. The question is, now what to do with your funding? And, how do you make it last?

It’s likely that you will have had to agree fund allocation to some extent with your investors prior to securing the funds, but it will be important to re-visit and re-confirm this now that you are past the negotiation stage. In reality, you will make spending decisions every single day, how ever small. The fourth part of the BoF Basics discusses the allocation of your capital, or more simply, how and where to spend your money.

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WWD’s lead story today reveals that TSM Capital, an offshoot of Marvin Traub Associates, has invested in  London-based Matthew Williamson, having raised funds from a silent investor. The deal gives TSM a 22% stake of Williamson’s business. Last year, Williamson took on investment from Baugur Group, where Aslaug Magnusdottir, now one of the key individuals behind TSM, was responsible for venture investments, like the one in Williamson.

The investments will focus on early stage businesses in fashion apparel and accessories. Traub described to WWD the market gap that TSM is aiming to fill:

“Over time, we frequently saw many great companies whom we thought were talented, and who could use funding. But if you’re trying to raise a range of $5 million to $25 million, it’s much more diffi cult than if you need to raise $50 million or $100 million.”

Despite some market uncertainty, it seems there is still interest in fashion investing, even if it is at the riskier end of the investment spectrum.

Photoclip courtesy of nymag.com

Two legendary doyennes of the fashion world have been making news this week — and not just for their colourful fashions.

Today, Betsey Johnson announced a majority investment in her business from Boston’s Castanea Partners. Some observers are questioning Castanea’s logic for investing in a 30 year old brand whose namesake is already a grandmother and whose high-profile days are long over.  On the contrary, the business  has a solid own-retail network of 51 stores and a respectable $200m in sales. This could provide a great platform for further growth, as long as Castanea doesn’t dilute the brand’s famous quirky irreverence, which is what is most appealing to its loyal fans.

Earlier this week British fashion icon, Zandra Rhodes, garnered yet another high profile article highlighting the resurgence of interest in her designs around the world. While she doesn’t have a business on the same scale as Johnson, she is still finding news ways of capturing value from over 3 decades in the industry, using her iconic colourful style as the basis for a series of licensing agreements with MAC (for makeup), Pologeorgis (for furs), and the Dash Partnership (for jewellery).

So, why are the fashion grannies on the rise?

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This week’s Economist ominously warns of “The Trouble with Private Equity” at a time when many in the fashion world are wondering how the infusion of private capital will impact their industry. In the last month alone, La Perla, Samsonite and Valentino have all been snapped up by private equity funds. Just today, The Sunday Times broke the news that Prada has also been in talks with private investors. (Not surprisingly, Prada has denied these reports, but it is not hard to see why this would be a natural option for Patrizio Bertelli, especially given several failed attempts at taking Prada public.)

The recent investment exuberance around fashion brands is a dramatic departure from the stance that many professional investors took even just a few years ago. Back then, they said there was too much “fashion” risk and that without predictable and stable revenue streams, their highly-leveraged (heavy on debt, light on equity) investment strategies were untenable. Now, with more and more money fighting for fewer investment opportunities, it seems much of this wisdom has been thrown out the window. 

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Taking on financing is one of the most important decisions an emerging fashion company will make.  This step is absolutely essential because the early stages of growth often requires significant amounts of working capital that cannot be generated by the business alone.  So, unless you are independently wealthy and sitting on a pile of cash, financing decisions will be part of your critical path, early on.

What is the difference between equity and debt?
Financing can come in many forms, but it basically comes down to equity versus debt.

Equity investors (in this case, venture capitalists or angels) provide cash to invest in your company and  therefore end up sharing ownership of the company with you. They invest in the hopes that your business will grow and that they will have some positive return through shared profits and upside.  They may offer you resources and expertise to help drive the business further. In fact, this is much preferred to someone just giving you cash and leaving you to fend for yourself.  If, however, you disagree fundamentally with your investor on where you want to take the company and how you will do it, then you may find their “help” a nuisance. Thus, when evaluating equity investors, choose someone who is aligned with your strategy and who has the industry and/or functional experience that your business needs to grow.

Debt financing, on the other hand, usually comes in the form of loans, where you are required to pay back  the money you have borrowed, plus interest, using a fixed schedule of payments that can be spread out over many years. While debt providers won’t be actively involved in your day to day business, taking on debt will mean you will have an additional cash outflow that your business will have to be able to support each month to stay on good terms with your bank. If payments aren’t made regularly, you may quickly find yourself dealing with irate calls from your bank manager. In the worst case, taking on too much debt  could drive your business into bankruptcy. Debtors are always paid back before profits are shared amonst the shareholders of your company.

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