Q&A: Robert W Baird’s Terry Huffine

Katharine Hidalgo: You were recently involved in the sale of BlueGem's needlecraft and yarn specialist DMC Group to Lion Capital. The GP reported a 2.7x return on its investment and an IRR of 55%. Can you tell us more about the deal?

Terry Huffine: Over the holding period, BlueGem brought together a number of companies, including Wool And The Gang and Sirdar. There is a lot of crossover in the craft community. About 60% of people who knit also crochet and vice versa and BlueGem saw an opportunity to bring together companies in these adjacent sectors.

Lion Capital saw an industry that did not have a lot of private equity interest and which was not well-trodden. Knitting and needlecraft have an incredibly loyal consumer base and in terms of the macroeconomic cycle, Lion Capital thought this was exactly the type of business it should be looking at.

KH: DMC and Hoooked are recent acquisitions by GPs and companies such as Novita and Rowan are now selling through mainstream channels such as John Lewis. Why is the profile of the industry rising?

TH: We did some research on why people take up needlecraft and 66% responded that they were influenced by fashion. Cara Delevingne is a big fan of Wool And The Gang, which contributes to the rising profile. We have seen that celebrities use it to relax and knitting lends itself to wellness trends. At the same time, you have Instagram and Pinterest, which are the perfect platforms for industries focused on creating and sharing.

KH: What makes for an attractive target in the yarn and knitting industry?

TH: There a quite a few local leaders in the industry and that does not lend well to profitability, nor growth prospects. Therefore, it is important to find companies that have the potential for international exposure, which can build on that advantage. Some sub-sectors in the broader craft space have less intellectual property than others, or are more exposed to private labels. For example, everyone buys their yarns from the same places, but the yarn consumer is very brand-focused. It is important to be able to differentiate between competitors.

KH: Do you see more consolidation in the future following this deal?

TH: Definitely. There are four or five examples of investment from private equity in the industry already, such as Spinrite in Canada, Michael's in the US, and Hobbycraft in the UK. Buy-and-build is a good route to profitability and sustainability here. Retail chains continue to look to simplify their supplier base so a lot of brands will lose distribution. This will differ from market to market, but there will be a lot of winners and losers. Companies must have a strong profitability profile, even with dedicated consumers.

KH: Can the industry expect more startups and venture capital investment in the future?

TH: Yes, startups will develop around knitting starter kits and driving online inspiration. It is important to make the activity easy and give people a starting point, so I believe that is where companies can make a space for themselves in the future.

As for VC interest, it would not surprise me. There is a huge opportunity in the craft space to really specialise in one sub-sector and be the community driver. Whether that niche will be filled by VC, I do not know, but companies like that do not exist today.
 
KH: How resilient would DMC and the knitting industry be to a downturn?

TH: This industry is so well-suited to that. This is a sector and a company that performs well in all macroeconomic environments. People really care about these crafts and will continue to pursue these hobbies in any circumstance. Through 2007 into 2009, this industry just continued to hum along. We do a lot of work across the broader craft sector, and private equity firms have certainly started to recognise the attractive features of the sector. It only takes one deal to make investors feel comfortable to go into an industry.

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