IN DECEMBER 2003, Robert Burke, then fashion director of Bergdorf Goodman, was in Paris giving a talk on the booming business of fur accessories when he looked around the ballroom at the Hotel George V and noticed that a quarter of the seats were filled with men in business suits. During dinner and coffee breaks at the two-day luxury conference, the suits from places like Bear, Stearns cornered Burke and bombarded him with questions about luxury businesses—which ones had potential to add secondary lines and which ones could expand with worldwide licensing.

For years the luxury sector, now a $140 billion business growing at approximately 7% a year, according to the Telsey Advisory Group (TAG), an independent research firm based in Manhattan, has been populated by a handful of familiar faces: Bernard Arnault of LVMH, François-Henri Pinault of PPR and the odd manager of Gucci or president of Chanel. But cash-rich private-equity firms have taken note of the impressive numbers those companies are posting. Gross profit margins for apparel are 50%, and for leather goods they can be as high as 77%, according to TAG. So it's not surprising that in the past two years dealmaking in this sector has shifted into overdrive. Since February alone, Jil Sander was snapped up by London-based Change Capital Partners, English luxury retailer Asprey was bought by New York City--based Sciens Capital Management and a U.S. hedge fund, and the Italian apparel brand Piazza Sempione was acquired by Paris- and Milan-based L Capital. More deals are rumored to be in the works.

"I get calls every day," says Robert Bensoussan, CEO of Jimmy Choo, who, with funding from private equity, took the brand from $20 million to $140 million in sales in five years. "Whether they are managers asking for advice on how to speak to private equity, family-owned companies asking what working with private equity is like or private-equity people saying, We're interested in your success story."

Bensoussan, who had orchestrated the sale of British apparel firm Joseph to a Belgian investment group and before that had been president of Christian Lacroix at LVMH, ultimately sold Jimmy Choo in 2004 to Lion Capital for five times what he and his partners at Phoenix Equity Partners originally paid in 2001. "It gave a lot of people a wake-up call," he says.

Most analysts say the attraction of luxury these days is the growth opportunity. TAG's Dana Telsey, who has tracked retail for 21 years, attributes the increased interest to "how profitable these businesses can be when run well." Companies like L Capital have earned five times their investment in firms like retail clothier Gant and three to four times their investment with Antichi Pellettieri SpA, an Italian apparel and accessories company—in just over three years.

Investors see the possibility of expanding the brands in China, India and Russia, adding secondary lines and product extensions. "All companies we get involved with have attractive growth characteristics," says John Megrue, a co- CEO of Apax Partners, which just bought Tommy Hilfiger. "Well-run consumer companies ought to grow way north of the GDP."

But not every deal hits the ball out of the park; fashion remains a risky go-with-your-gut business. Every six months the creative cycle has to rev up again, and God forbid the brand doesn't hit the right trend one season. The result can be costly, with stores filled with unsold merchandise. The potential for failure is great, "but the upside opportunity is also that great," says James Hurley, who follows the luxury market at TAG.

One of the reasons Change Capital viewed Jil Sander as an attractive investment was that it doesn't rely on up-to-the-minute trends to the degree that a brand like Dolce & Gabbana does. "You would not expect a collection to come out and lose 50% of your sales because you didn't hit the right button," says Stephan Lobmeyr, a managing director at Change Capital. "I'm not saying it's not innovative. You need innovation or you don't have a place in high fashion, but it's more stable."

Bensoussan helped limit his risk potential at Jimmy Choo by building a classic collection. "There were these fabulous styles that they used to throw away every season," he says. "Now 10% of our collection is made up of classic styles, and that group has become 25% of the business." Bensoussan made other changes too, streamlining production, opening more stores and adding handbags and eventually fragrances to the line. "We had a Ferrari, but we had to put a bigger engine in."

Good management like that, something relatively new to the fashion business, is what draws investors in. "That's probably the No. 1 criterion for any private-equity investment," says Philippe Franchet, a partner at L Capital, explaining why they invested in the low-profile Piazza Sempione brand. "The management team is brilliant." Translation: it has a manager with a good production record and a solid business plan. When Enrico Morra, managing director of Piazza Sempione, and the company's founders met with L Capital's partners, they outlined exactly what they wanted to do, including opening more stand-alone stores and expanding into categories like handbags and shoes. In short, they had an estimated $60 million business and wanted to take it global.

"Entrepreneurs can grow a business to about $50 million," says William Smith of Global Reach Capital, a new private-equity firm that specializes in consumer brands and just invested in Tory Burch, a New York City--based apparel and accessories brand. "That's where we come in. We can take it to $250 million." Says Burke, who now works as a consultant to private-equity firms, including Global Reach Capital: "There are a lot of great fashion brands that don't have the capital or the business acumen to grow." That's where a private-equity firm can provide them with the money and the right kind of management."

Private-equity cash allows a small company to expand worldwide quickly and strategically. "It's not just an injection of money," says Morra. "They're a sparring partner, someone to sit down to discuss, 'Do we have to open on Madison Avenue or in the meatpacking district?'" He partnered with L Capital because its advisers knew how to get handbag and shoe lines up and running, something that could help Piazza Sempione avoid missteps.

For family-owned companies like Piazza Sempione eager to maintain some sort of control, private equity is a plus. "Before, the only chance for a family company was to sell themselves to a big conglomerate or luxury group," says Bensoussan. "And then they would lose all their power." And it's good for managers; it gives them something they like. "Freedom!" says Bensoussan, laughing. "If you deliver what you promise, it's a dream world." Working for a conglomerate like Gucci or LVMH has its advantages—access to real estate, saving on advertising. But there are downsides. "Sometimes the smaller companies don't get all the money, all the care, all the love that is needed," he says.

But unlike Gucci Group or any other conglomerate, private-equity firms aren't in the investment for the long haul. Brands bought today will undoubtedly be on the market again in five or so years, sold to another private-equity firm or a luxury conglomerate—or they are taken public. "It's a different approach," says William Cody, a professor in retail and marketing at University of Pennsylvania's Wharton School. "Gucci is looking to build a brand to fold into its business. Private equity is looking to build a brand to sell. They always have an exit strategy." So if things aren't working out, the owners or managers may be moved aside. But, adds Cody, "private equity can give them the capital to move them from the runway to the street." Which is good not only for fashion but also for consumers. "We may get access to designers who may not be able to get into the stores on their own. It all adds up to more choice."

In the end there needs to be a balance between the showroom and the boardroom. Designers may know how to make a gorgeous frock, but "sometimes they do more for the image than the profitability of the company," says Lobmeyr. "If the two parties respect each other—when the financial people do not try to influence the creative process and the creative people understand there are basics that must be followed in order to run a company profitably—it's actually a winning formula."

But will that formula change the face of luxury? "If they change something in fashion, it will be in how they manage companies, but it will never be the product, the style, the design," says Bensoussan. "They don't know anything about it. After all, the next day they are looking into fruit smoothies."