L.A. Clothing Companies Tailor Private Equity Deals

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L.A. Clothing Companies Tailor Private Equity Deals
Ad for Velvet clothing.

L.A.’s apparel industry is in growth mode, and several local clothing companies recently have called on private equity firms to fuel their expansion.

Flush with cash from a recent private equity investment, Culver City apparel maker Velvet Inc. is charting a growth plan that includes opening its own retail stores, licensing its name for accessories, and adding to its lineup of women’s and men’s clothing.

“We have in place a tremendous infrastructure here in Culver City,” said Henry Hirschowitz, Velvet chief executive. “And this allows us to go and explore other things.”

New York private equity firm Snow Phipps Group announced two weeks ago that it invested in Velvet in exchange for what Snow Phipps termed a “significant” stake in the apparel maker.

Hirschowitz, with Velvet designers Jenny Graham and Toni Spencer, will continue running the company, while Andrew Megibow – a Snow Phipps operating partner and veteran apparel executive – will serve as its nonexecutive chairman. Financial details of the deal were not disclosed.

Velvet, whose products are sold worldwide at major department stores such as Bloomingdale’s and specialty boutiques, is just the latest local apparel company to receive such a capital injection. Last month, New York private equity and brand management firm Bluestar Alliance acquired a majority interest in downtown L.A. apparel maker English Laundry. Last year, Century City talent agency Creative Artists Agency, in partnership with New York private equity firm Irving Place Capital, acquired a majority interest in J Brand, a downtown premium denim maker.

Industry insiders said the recovering economy is driving apparel makers to seek growth investments from private equity firms in part because executives can now get higher valuations for their companies compared with what was available during the depths of the recession.

“The business performance has improved,” said Frederick Schmitt, managing director at West L.A. investment banking firm Sage LLC, which advised Velvet on its deal. “So sellers are a little more eager to seek liquidity transactions now that their businesses have stabilized, improved and are headed toward growth.”

Private equity firms have historically done well with apparel. For example, London private equity firm Apax Partners purchased Tommy Hilfiger in 2006 for $1.6 billion and sold it last year for $3 billion.

“They are focusing on retail and apparel and here’s why: When it works, the cash flow is very good,” said Howard Davidowitz, chairman of New York retail consulting and investment banking firm Davidowitz & Associates Inc. “And these guys love cash flow.”

Office operations

Hirschowitz and his wife, designer Graham, launched Velvet in 1998 out of a small Santa Monica office with a collection of fashionable T-shirts for women.

Velvet now employs more than 200 and operates out of a 50,000-square-foot building that houses the company’s corporate executives, its design team and also serves as a distribution center. Its clothes are manufactured in the Southern California area and overseas.

The company’s growth has been driven by an expansion into women’s tops, skirts and dresses, in addition to the creation of men’s brand Velvet Men and higher-end women’s brand Spencer & Graham.

Velvet sells it goods wholesale to major department stores, boutiques and online shopping sites such as Shopbop.com.

As the apparel maker looks toward more significant growth, the company is working with Snow Phipps’ Megibow to launch branded retail stores, with the first shop most likely opening in Los Angeles.

“We feel strongly about the prospects for stand-alone retail from a volume and branding standpoint,” Megibow said.

Megibow, who served as chief operating officer at women’s apparel company Ellen Tracy Inc. for 15 years, said the private equity firm invested in Velvet because the company has a strong management and design team and well-run corporate infrastructure. In addition, it can successfully be turned into a lifestyle brand with the addition of accessories.

Paul Zaffaroni, director at Newport Beach investment banking firm Roth Capital Partners LLC, which advised English Laundry on its deal with Bluestar, said partnerships with outsiders such as private equity firms help apparel companies in many ways, not just providing cash.

“They are getting help to grow and enter new categories, or open retail stores or take their brand to the next level,” Zaffaroni said. “Typically when private equity firms make investments in apparel companies, they either have operating partners to help management or put those people on the board or they will have other connections with bigger retailers that maybe they are not in.”

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