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Texas Pacific, Leonard Cohen to Buy J.Crew

Just as we predicted earlier this year, private equity firms are starting to pay closer attention to the retail sector. This morning news emerged that TPG Capital and Leonard Cohen & Partners have agreed to acquire J.Crew for approximately $3 billion.

While investing in a mid-market apparel retailer would seem to be a risky bet in today's environment, J.Crew has a few things going for it that other apparel chains don't. To begin with, in spite of its somewhat upscale pricing model, it has performed better in the downturn than some of its competitors. It even got an unexpected marketing boost from the First Family last year.

It has also continued growing through new concepts, even during 2009. Plus, J.Crew's chairman Mickey Drexler has become so revered in the retail industry for his work at the chain (and his previous expansion of Gap Inc.), he's a bona fide celebrity.

The interesting thing in today's deal is not why TPG and Leonard Cohen would focus on J.Crew, but how they hope to capitalize on their investment. In the past, the standard private equity play would involve financing the transaction through selling off the retailer's real estate holdings. Today, the retail real estate market might be in better shape than it was in 2009, but it's still nowhere near healthy. So there couldn't be much profit in J.Crew's store portfolio--at least not yet. And the chain is not struggling, so there is not much for TPG and Leonard Cohen to do on the management front. So what's the plan then? We'd be curious to hear your thoughts.

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