Standard General, a little-known hedge fund that has taken the reins of American Apparel, has mapped out a recovery plan for the retailer with or without its ousted Chief Executive Officer Dov Charney.
The fund invests in companies that have potential even though they may be bogged down by debt and are undergoing an event such as bankruptcy.
Standard General has not always succeeded — consider its passive investment in RadioShack's stock, which has fallen about 69 percent this year. But it has a track record of turning positions in distressed companies into board seats and eventual profitability.
The 14-employee firm manages about $1.1 billion. In 2013, it posted returns of 32.5 percent net of all fees on its offshore fund, according to a document obtained by Reuters. That fund was up 8.6 percent in 2012 but down 6.2 percent in 2011, according to a separate report.
Standard General first focused on American Apparel six months ago, because it "has a strong underlying brand but was in turmoil," the fund's partner David Glazek told Reuters. "It has a balance sheet problem that we can help fix," he said.
Standard General's investment in American Apparel recently climbed to 44 percent after Charney gave his stake to the hedge fund as collateral for a loan, according to a filing. If Charney repays this loan, the hedge fund can buy back almost 19 percent of the company stock at about 71 cents per share. The stock closed at $1.15 Wednesday.
Standard General has promised $25 million to American Apparel, which the company may use to repay a $9.9 million loan. As part of the deal, the hedge fund will nominate three candidates to the retailer's new board, one of whom may be a Standard General partner.
Glazek said he is optimistic that simple changes can help turn around the retailer, including opening more stores and improving its website.
"The American Apparel e-commerce platform is so antiquated that you don't need much to really improve it," said Glazek.
Standard General has used a single board seat to steer several companies through major transitions, and it is turning to these experiences as it plans American Apparel's future.
In 2010, the hedge fund's co-founder Soohyung Kim secured a seat on Young Broadcasting's board after Standard General bought distressed bank loans of the bankrupt $200 million company, according to Glazek. Kim, previously a principal at Och-Ziff, helped refinance the company's loans, appoint a CEO, roll out HD on its stations and secure a merger with Media General.
"He's certainly not shy about his point of view," said Media General board member Charles Diao, who has known Kim for more than a decade. "But he's not going to run the business."
Now a second merger, between Media General and LIN Media, will net Standard General 20 percent of a $5 billion company, pending government approval.
"In terms of our time frame and our approach and our style, there are some similarities," Glazek said, comparing American Apparel with Young Broadcasting. However, he cautioned that plans for American Apparel do not rely on future mergers or acquisitions.
While Standard General's largest position is in the media sector, it has about 70 investments across many industries. It believed the market was "extremely bearish" on RadioShack, and the potential reward from the retailer's success far outweighed the cost of losses from its 10 percent stake, Glazek said.
One former investor said he withdrew his money from the fund in 2013 because the returns were not worth paying premium fees of 2 percent and 20 percent.
"They were far more risk averse than I thought they would be," the investor said.
As for Charney, a board committee will review the findings of an investigation by FTI Consulting to determine whether he may return, after the old board ousted him on June 18 for misconduct. "It's going to be entirely fact-based and at the discretion of the board," Glazek said.
(Reporting By Jeffrey Dastin; Editing by Steve Orlofsky)