J.Crew filed for bankruptcy this week after years of lackluster sales, but the buyout firm that took it private almost a decade ago still made off with a hefty profit, according to public filings and internal documents reviewed by The Post.
Texas-based TPG, headed by billionaires David Bonderman and Jim Coulter, has made a fortune off the preppy retailer using various financial tactics — including charging the company for buying it and managing it — even as the business steadily deteriorated under its watch, documents show.
The $72 billion firm bought J.Crew for $3 billion alongside then-CEO Mickey Drexler and private equity firm Leonard Green & Partners in 2011, when then-first lady Michelle Obama could be seen wearing their clothes. In the ensuing nine years, TPG appears to have extracted close to $100 million in fees off a $33 million investment — a return of three times its money, according to public filings and firm documents.
Despite leading the deal, TPG only contributed to a fraction of the $1.3 billion down payment required to get the deal done. It did this by forking over just 5 percent of its $650 million share of the payment, or roughly $32.5 million, according to a 2014 fund document. It raised the rest of the $650 million from its investors, including state and local pension funds.
The firm then charged investors who contributed to the $650 million investment up to 1.5 percent annually for the first six years of an investment, or $58.5 million, and 0.75 percent annually for the remainder of the fund’s life, or $14.7 million, according to media reports. That represents fees of $73.2 million even as J.Crew went from declining profitability to losses that ended up lasting six consecutive years under TPG’s reign.
Even before the coronavirus forced J.Crew to shutter 500 stores in March, J.Crew posted a net loss of $78.8 million for the year that ended Feb. 1 amid sagging sales and a towering $1.7 billion in debt on its books.
Part of the problem, said Jane Hali, chief executive of investment research firm Jane Hali & Associates, was that the retailer failed to meet customers’ changing tastes.
“They were very good at career wear and casual. You could get tops and skirts. But people don’t get dressed to go to work anymore. You can wear jeans and they didn’t make the change.”
The company’s massive debt load, which was only deepened by its new owners’ aggressive expansion plans, made it harder for it to pivot into new clothing lines, Hali added.
“With the amount of business they were doing, why not cut expenses? And they had the ability to do that.” The hefty annual fees it was required to pay its private equity owners didn’t help matters, she said.
Indeed, as part of the 2011 acquisition, J.Crew was required to fork over a minimum of $8 million in annual fees for monitoring its own business, according to public filings — or $74 million, including an extra $2 million it paid in 2019. TPG, along with Leonard Green, also charged J.Crew a one-time $35 million transaction fee when buying the business, according to public filings.
Those fees add up to $109 million. While it’s unclear how much went to TPG versus Leonard Green, TPG gave 65 percent of its take to its investors, according to industry publication Private Equity International. Assuming TPG split the $109 million with Leonard Green, it would have walked away with roughly $19 million.
Added together, TPG’s total haul looks to be about $92 million.
TPG objected to The Post’s calculations without providing specifics. “This analysis makes material misstatements and numerous incorrect assumptions about the structure of our investment, management process, and economic arrangement with our investors.”
Drexler, who had made $300 million in the 2011 sale of J.Crew, is not believed to have shared in those fees, which tend to be reserved for private equity players. He did, however, invest $100 million of his money in TPG’s buyout — and likely lost it all, as bankruptcies typically wipe out equity holders.
J.Crew plans to emerge from bankruptcy after its lenders and bondholders swap their debt for an 82 percent equity stake in the reorganized company.
Drexler, who stepped down as the company’s chairman last year, couldn’t be immediately reached for comment.