When the markets tank and the economy looks grim, smart investors go looking for bargains. And, according to some observers, few industries have more potential upside at the moment than fashion.

"If you're a strategic investor, it's a terrific time," said Haresh Tharani, chairman of the privately held conglomerate Tharanco Group. In February, the company, already the majority owner of the five-year-old brand doo.Ri, purchased Joseph A., a New York-based knitwearmaker.

Since early last fall, with fuel prices high and markets shaky, interest in acquiring smaller fashion brands--as well as larger ones that haven't yet expanded internationally--has been on the rise. Smaller private equity outfits that had been priced out in recent years are looking for toeholds in the industry for $1 million to $10 million; larger companies outside of the apparel business are seeking to diversify; and foreign investors are trying to capitalize on the weak dollar.

Tharani, for one, is hot on the prowl. "We're looking at a dress company, which makes sense because we have two other dress companies," he said. "It will make us more important with sourcing and with retailers. We're looking at a high-end shoe-and-accessory company and at a men's designer brand. There are many different opportunities, but most people are gun-shy."

Calvin Klein owner Phillips-Van Heusen said last month that acquisitions in line with its current brands (read: luxury brands) are its first priority. The company, which said it has both cash and access to credit, is strategically looking to the future, taking advantage of bargains that may be out there in a precarious economy.

"This is the time to make acquisitions that in the future pay significant dividends," chairman and C.E.O. Emanuel Chirico said on a conference call with financial analysts on March 25. "Chaotic times are the times when good companies do acquisitions that can really fuel growth going forward."

Deals in the past six months have ranged from tiny to large. A consortium of private equity groups bought Ellen Tracy from Liz Claiborne in February for $42.3 million, a deep discount from the $180 million Claiborne paid for the company five years earlier. The buyers benefited from the economy and from Claiborne's fire sale of noncore brands.

SK Networks, an energy company based in Seoul, South Korea, bought Asian duo Y & Kei, now selling under the label Hanii Y, and its brand Obzee, one of the most popular in the Korean market, for $60 million in December. SK also holds a stake in the designer business of Richard Chai, a former designer for Marc Jacobs and TSE.

The Marvin Traub-led TSM Capital made investments in Rachel Roy in November 2007 and Matthew Williamson in August 2007.

In the current financial market, the off-the-charts valuations of recent years are history. "People still have hopes of getting the valuations that they would have in 2007, but they won't," said one New York-based private investor who has recently put money into several designer companies. Last year, he pointed out, companies were selling for as much as 14 times earnings before interest, taxes, depreciation, and amortization; now that's down to 9.8.

"When fashion companies are right-on, there's the potential to make more money than in hedge funds," he said. "Designers are the masters of spinning nothing into gold."

Investors are also looking for very specific qualities in the apparel companies they consider acquiring. (See five brands that are well poised for acquisition.)

"Traditionally, if it's a startup or close to one, it's not interesting," because investors want a proven track record, said Robert Burke, principal of Robert Burke Associates, a New York-based luxury fashion consulting firm that advises designers and helps assemble deals. "Young designers are a gamble. There is not much history, and there's a greater risk. We believe in young designers and have worked with many, but cutting-edge fashion is not always the best investment."

Clear opportunities for growth are most important, said Burke. "There needs to be expansion potential, domestically and internationally." A company also has to be willing to expand the number of products it offers and venture into new categories, as Michael Kors did into accessories and shoes after Sportswear Holdings bought his company. Having a few stand-alone stores allows investors to gauge performance--and potential performance.

Most importantly, a company has to be willing to work with new partners. "You have to gauge how open designers are to having a partner or an investor--if they're truly interested in listening and going in other directions," he said. No one wants to see a repeat of the Prada-Jil Sander deal. Prada bought the designer's profitable namesake brand in 1999; she left twice during the next four years.

Time for a new reality show called What Not to Buy?

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