Deals

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

In e-mails to customers, J.Crew has touted its sale events as a "can't miss steal." Private equity backers TPG and Leonard Green & Partners can no longer say the same about the company.

Less than five years after the duo's leveraged buyout of the clothing retailer, TPG slashed the value of its stake by more than 80 percent, or roughly $400 million, Bloomberg News reported late Friday. Even after adding back dividends and fees, the firm's investment in J. Crew is officially under water. 

Out of Favor
J. Crew's struggles have weighed on the value of its debt, not just its equity.
Source: Bloomberg

That's an outcome that TPG didn't count on, especially considering that an earlier investment it made in J.Crew in 1997 delivered some $800 million in profits.  It's also a tough result for J. Crew's CEO Mickey Drexler, who was recruited by TPG in 2003. In return, he helped land the firm a second chance at owning the retailer by using his clout to organize a sale process that excluded everyone but TPG. 

It's easy to see the attraction of backing a proven management team and a familiar company. But in the case of J. Crew, persistent sales declines only show that its namesake brand has lost its cachet.

Losing Loyalty
J. Crew's sales at established stores have declined for five straight quarters.
Source: Bloomberg

TPG isn't the only firm to bet on a past winner in the hopes that lightning might strike the same place twice. In some cases, second bites have actually worked out. Friedman Fleischer & Lowe, for one, had better luck with its 2002 and 2008 investments in mattress maker Tempur-Pedic (now known as Tempur Sealy International).  Both resulted in hefty profits. 

More recently, Silver Lake's decision to revisit Avago Technologies in 2013 -- eight years after an earlier foray in the chip maker -- has been lucrative. Rather than structuring the transaction as a leveraged buyout the way it did the first time around, California-based Silver Lake invested $1 billion through convertible notes in its latest foray. Its stake in the company (since renamed Broadcom), is now worth around $3 billion, a healthy result, especially considering the firm's earlier investment delivered five-fold returns. 

Advent International's second bite of Lululemon Athletica also appears fruitful -- at least for now. Its stake, acquired from the company's founder Chip Wilson in August 2014, has appreciated by roughly $400 million, thanks to a rebound in the yoga-wear retailer's shares. 

Stretching Higher
Lululemon's shares have beaten the benchmark index since Advent bought half its founder's stake.
Source: Bloomberg

Unfortunately for TPG, its second shot at J.Crew delivered a grim reminder: Repeat success is anything but guaranteed. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net