In April, Dallas-based private equity firm Texas Pacific Group sold the last of its J.Crew Group Inc (NYSE:JCG) holdings for $41.3 million, ending a 12-year relationship with the specialty retailer. TPG sold its remaining shares due to a rising stock price in recent months. TPG's history with J. Crew dates back to 1997, when it carried out a $559.7 recapitalization, which included $63.9 million in equity.

IN PICTURES: World's Greatest Investors

The funding gave TPG an 85.2% stake in the company. Five years later, in 2002, it went after deposed Gap (NYSE:GPS) CEO Mickey Drexler, who slowly built the prep store into a retail contender.

Today, we know J. Crew as a popular wardrobe choice for First Lady Michelle Obama. TPG's investors made a lot of money from J. Crew over the years. Those who invested in J. Crew's 2006 IPO haven't been so lucky.

How Sweet it Is
TPG bought an additional $73.5 million in J. Crew stock in the July 2006 IPO, bringing its total investment to $137.4 million. Now let's see what they were able to get for their gambit.

January 31, 2007, TPG sold nine million shares to the public at $37.81 for net proceeds of $325 million. This put it squarely in the black with 12.2 million shares still to sell. Over the next 27 months, TPG sold these holdings for $426.3 million, which includes the funds from the final sale in April. All together, TPG made $613.9 million from its 12-year investment, an annualized gain of 15.2%.

This compares very favorably with the S&P 500, which lost 0.4% annually over the same period. How did the IPO investors do? Well, that depends on when they sold. Those that bought the $20 shares and sold

July 6, 2006, J. Crew's first day of trading, made as much as 37.5% on their investment. Any hangers-on didn't do nearly as well, making just 39 cents over 33 months. Finally, those investors looking to benefit from the momentum play buying the stock the second day of trading and holding until today, have lost 25.8% of their investment. Despite this, it's still better than the 29.1% decline in the S&P 500. Take that, passive investors. (To learn more about private equity, read What Is Private Equity?)

Other TPG Investments

Company Shares Held Market Cap
Burger King (NYSE:BKC) 15.13 million $2.50 billion
Graphic Packaging (NYSE:GPK) 132.16 million $609.77 million
Fidelity National Information Services (NYSE:FIS) 2.89 million $3.51 billion
SuccessFactors Inc. (Nasdaq:SFSF) 7.07 million $486.31 million

An Appetizing Deal
Burger King, the most prominent of the four listed above, was bought by TPG, Goldman Sachs (NYSE:GS) and Bain Capital in December 2002, for $1.5 billion, down substantially from the $2.26 billion drink maker Diageo (NYSE:DEO) asked for just five months earlier. Analysts suggest TPG and its partners put just $325 million of their own cash into the deal and were in the black by February 2006, when Burger King paid them a special dividend of $367 million. If you add in a one-time payout of $30 million to end a management contract with the private equity partners, pre-IPO investors had to be ecstatic.

Today, TPG holds approximately 15 million shares worth $270 million. Using an average selling price of $20 for the 21 million shares sold between the IPO in May 2006 and today, TPG conservatively has made $447 million in profits from its initial investment with another $300 million payday to come. That's a sweet gain for less than seven years. Meanwhile, Burger King's stock is barely above its IPO price of $17. Some things never change.

The Bottom Line
The above examples reasons investors should avoid IPOs. They just don't favor new investors. (To see how private equity plays a role for different firms, see Private Equity: A Trendsetter For Stocks.)

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  6. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  7. Professionals

    What to do During a Market Correction

    The market has what? Here's what you should consider rather than panicking.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  9. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  10. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!