High Fashion Investment: Inside Jason Wu’s Lessons From Private Equity

Designer Cuts Shoe Line, Expands in Handbags

A move by investment company InterLuxe may mark a new trend in fashion: purchasing emerging labels and turning them into high-powered brands.

When Melissa Beste moved into Jason Wu’s offices on West 35th Street in New York this fall, she quickly noted the fashion designer was spending too much time directing sales, budget and merchandising activities at his eponymous label.

“It’s a small team,” says Ms. Beste, chief executive of InterLuxe, which bought a majority stake in Mr. Wu’s luxury label in September. “Jason has had to get involved in so many more things than a creative director should.”

From her perch at InterLuxe, Ms. Beste is leading changes at Jason Wu that include hiring a financial controller and temporarily dropping his shoe line. The changes are meant to transform the young label into a high-powered fashion brand. The goal is to emulate the Ralph Lauren brand by making clothes, accessories, cosmetics and even, someday, housewares, such as bed linens and dishes.

“I’ve always been focused on the world of Jason Wu,” says Mr. Wu, who is known for designing Michelle Obama’s two inaugural gowns. “I would like to look at the next level of the company and that requires some investment.”

The Jason Wu label is the first investment of InterLuxe, founded this year by Thomas H. Lee, a well-known private-equity investor, and Gary Wassner, a garment industry financier. InterLuxe is in talks with six other potential acquisition targets, five American and one European, says Mr. Wassner, who is InterLuxe’s chairman.

Their idea is to buy into emerging labels and infuse them with cash and high-powered management resources, such as the likes of Ms. Beste, who left her job as U.S. chief executive of the Swiss fashion house Akris to join InterLuxe. Formerly she was U.S. president of the Alexander McQueen label.

This approach, relatively new in the U.S., is old-hat in Europe, where giants like Kering, LVMH, and Richemont operate brands such as Gucci, Louis Vuitton and Chloe and are on the hunt for new labels. The big companies hire top financial and marketing talent to guide and promote labels. Their executives specialize in the delicate balance between freeing up creative talent, and keeping budgets in line and the right products on shelves. The big owners deploy technologies to manage inventory and distribution, and make cost-saving deals with factories.

In the U.S., private-equity investors have often been reluctant to invest in luxury brands, which depend, like Broadway shows, on a designer’s taste and are subject to the whims of a fickle public. “You know, the U.S. has never had real fashion investors like Kering,” Mr. Wassner mused at the Derek Lam runway show in September.

“For sure, it’s not for the faint of heart,” says Bruce Cohen, who heads the private equity and strategy practice at management consulting firm Kurt Salmon. “There’s an inherent tension between the classic private-equity strategy and the way fashion houses work” in the U.S.

U.S. investors have preferred more predictable and established mass consumer brands like J. Crew and Calvin Klein, which fill store shelves with wearable basics that are updated to address current styles but don’t try to invent new trends. But there are signs that investors, from Kickstarter backers to venture capitalists, are becoming more intrigued by high-end fashion labels.

The meteoric rise of Michael Kors since going public in 2011, and Kering’s minority investment in the fledgling New York-based Joseph Altuzarra label last year were wake-up calls, says fashion industry consultant Robert Burke. In April, Boston based Berkshire Partners took a minority stake in Opening Ceremony, an innovative fashion retail brand. “Joseph Altuzarra—that got everyone’s attention,” says Mr. Burke. “We’ve seen the landscape of investments in brands change quite a bit.”

Mr. Lee’s past investments include consumer products from Snapple Beverage Corp. and General Nutrition Cos. to PETCO Animal Supplies Inc. He proceeded cautiously, speaking for more than a year with Mr. Wassner before forming their alliance this fall.

Mr. Lee says he is looking for “wearable” brands, whose clothes have broad appeal. “I’m a financial guy—am I afraid of fashion?” Mr. Lee posits. “I’m not afraid of Ralph Lauren.”

Mr. Wassner offers a degree of reassurance. He has spent nearly 40 years as what the garment trade calls a “factor,” who helps finance fashion brands by lending cash to produce collections. It is an area that banks often avoid, given the inherent risks.

“Thirty-seven years ago, when I started doing this, nobody would touch fashion,” says Mr. Wassner. Access to labels’ financial and sales data gives Mr. Wassner a wealth of information about how they’re faring, and which brands appear to have potential to scale up with multiple product lines. “There isn’t anybody out there that I don’t know,” Mr. Wassner says.

Mr. Wu surprised many when he sold a majority stake, rather than a minority slice, to InterLuxe. The package of financial and merchandising expertise “made the deal for me because that’s the kind of support, as a young brand, I’ve never had before,” says. Mr. Wu. “To think bigger you have to work with people who have seen bigger.”

Ms. Beste has been working in Mr. Wu’s offices most days since joining InterLuxe this fall. She helped him edit his pre-fall collection, currently in the showroom, to 120 looks from 150 last year. “But they’re all winners,” says Mr. Wu.

Cliff Moskowitz, Interluxe’s president, has moved into an empty office near Mr. Wu, where he is poring over budgets. “My job is to spend time with Jason Wu and get to know him,” says Mr. Moskowitz, a former investment banker.

Ms. Beste intends to hire about five people in business and production at the label, which currently employs about 20. She is seeking to establish formulas such as how many day dresses versus cocktail dresses in a collection will deliver the most profit. She also hopes to find the sweet spot for the price of a day dress.

Ms. Beste says the label will temporarily halt production of shoes, which have been slow to catch on, and will focus on expanding in handbags. Longer term, InterLuxe is looking to create a second label that is expected to launch for fall 2016 with prices slightly lower than Jason Wu’s designer category.

She acknowledges that dealing with designers can be tricky. “Every conversation is potentially difficult because it’s so personal,” says Ms. Beste. Mr. Lee says he has accepted that dealing with creative personalities is part of the territory in the field of luxury. “You’re not expecting your top fashion designer to be Warren Buffett . ”