Falconhead in 3x NYDJ exit as firm shifts fund model

Target: NYDJ Apparel LLC

Price: Undisclosed

Multiple: 3x invested capital

Sponsor: Crestview Partners, Maybrook Capital Partners

Seller: Falconhead Capital LLC

Financial Adviser: Morgan Stanley & Co

Legal Counsel: Weil, Gotshal & Manges

The sale, to Crestview Partners and Maybrook Capital Partners, is the third exit in 13 months for Falconhead Capital, a New York-based buyout shop that is shifting its business model away from individual periodic funds in favor of an evergreen type structure.

Falconhead Capital acquired a controlling stake in NYDJ Apparel through an unleveraged transaction in September 2008 from founders Lisa Rudes-Sandel and her father George Rudes, who had founded the company in 2003 in Vernon, California, to provide fashionable denimwear to women over the age of 35 under the brand Not Your Daughter’s Jeans.

The volatile fashion industry is not a common investing sector for Falconhead Capital, which focuses on consumer-oriented companies with high growth potential, said David S. Moross, chairman and chief executive officer of the firm. “We saw something very interesting in terms of its momentum,” Moross told Buyouts in an interview. “We thought it was very undermanaged but had enormous potential.”

The company, which uses a specialized stretch denim to make mature women appear slimmer, was growing healthily at a time when the economy was falling into recession, even though it lacked infrastructure such as supply-chain management systems and was selling its products under four different brands at the time, Moross said. Falconhead Capital brought in a new management team, led by Edwin H. Lewis, who had held executive positions at fashion companies including Ralph Lauren, Tommy Hilfiger, and Massimo and who coinvested in the deal, Moross said. The founders also retained an equity stake.

During its five-year hold period, Falconhead Capital consolidated NYDJ’s four brands to one and upgraded its management technology systems, Moross said. Falconhead Capital took a dividend in August 2011 as part of an $80 million senior credit facility to recapitalize NYDJ, according to sister service Thomson Reuters Loan Pricing Corp, which tracks the loan market. The Financial Times reported in October 2011 that Falconhead had retained Morgan Stanley & Co to seek buyers for the company, but that effort apparently fizzled.

Although terms of the Crestview Capital sale were not disclosed, the exit involves a $162.5 million financing package, including a $150 million term loan and a $12.5 million revolver, LPC reported in December. “We think they’re going to be a great steward of the company,” Moross said of Crestview.

The NYDJ sale follows Falconhead Capital’s exit last October of Escort Inc, a maker of radar detectors and other automotive electronic products, and in December 2012 of Competitor Group Inc, a publishing business focused on endurance sports. All three exits came from Falconhead Capital Partners II LP, a $290 million fund from 2006. As of September 30, 2012, that fund was returning a 1.2x investment multiple and a 5.9 percent IRR, according to investor New York City Police Pension Fund.

Although that fund is fully invested, Moross said Falconhead Capital decided last year not to launch a follow-on vehicle but to finance individual deals separately, using a pool of committed capital but not in a fund structure. With the changes in the U.S. tax code, he said he believes the firm could make more money for its investors by deploying “pods of capital” for specific deals rather than in a traditional format.