As others flee, Staples owner Sycamore aims to dive deeper into retail with its biggest investment fund ever

Key Points
  • Sycamore is raising its largest-ever fund and plans to use it primarily for retail.
  • The new fund follows Sycamore's $6.9 billion acquisition of Staples.
  • Its fund plans come as other private equity investors continue to fear investing in retailers.
Staples owner raising biggest ever retail fund: Source

Most private equity firms are backing away from retail. As more shoppers buy online and Amazon creeps further and further into the space, money is flowing to more certain bets and avoiding anything bricks and mortar.

Not Sycamore Partners.

Fresh off its largest bet ever — the $6.9 billion acquisition of Staples — Sycamore is raising its biggest-ever fund, which it will use to invest primarily in retail, sources familiar with the situation said. The firm is looking to raise between $3 billion and $4 billion, one of the people said.

Sycamore declined to comment. The sources spoke on condition of anonymity because the fundraising is not yet public.

The new fund comes a month after Sycamore closed its acquisition of Staples, a deal that exemplified its creative and bold approach to retail dealmaking. The sale of the office supplies giant had perplexed private equity buyers and financing banks. Both groups saw opportunity in Staples' growing business-to-business platform but were unsure how to address its lagging retail business.

Sycamore's solution was to split the retailer into three parts. This allowed banks to finance the strongest parts of the business separately and give Sycamore the option to wind down its weakest unit — the retail business — at a later date. The move followed a playbook the private equity firm used in its purchase of The Jones Group.

This intensely operational approach stands in contrast to the traditional retail leveraged-buyout model. For years, private equity firms bought generally strong retail businesses to grow by opening new stores and ultimately sell them or take them public. This model fell apart as retailers found themselves needing to retrench their store base and invest in e-commerce, even as their hands were tied by the debt leftover from the buyouts.

The past two years have seen a relentless string of bankruptcies of private equity-backed retailers. Last month, Toys R Us filed for Chapter 11 in one of the largest retail bankruptcy filings ever. Others include Payless ShoeSource, Sports Authority and Gymboree.

As the traditional playbook has shown its limits, private equity firms have taken a large step back from retail investments.

The firms spent $32 billion on U.S. retail investments in 2006; by 2016, it was down to $2.6 billion, according to Dealogic. So far this year, private equity bets on retail are falling even more. Year to date, private equity firms have spent $818 million on retail deals, excluding Staples, less than half the $2.2 billion spent by this time last year.

Part of Sycamore's unique perspective and bold approach originates from its co-founder, Stefan Kaluzny, who has years of history and relationships within the retail space. The famously press-shy Kaluzny is perceived as smart, bold and not afraid of a challenge.

The fund also gets insight into the retail industry through its ownership of Mast Global Fashions, which manufactures apparel and footwear for brands globally.

Sycamore closed its first fund in 2012 with commitments of $1 billion and its second in 2014 with commitments of $2.5 billion. Its other investments include Belk, Hot Topic, Nine West and Talbots.

According to an analysis by Bloomberg in May, its first fund delivered an annualized net return of 51 percent through Sept. 30, 2016, while returns from his second fund had returned minus 4 percent.

Bloomberg said the first fund's performance put it at the top of all billion-dollar buyout funds started that year, but the second fund, in its early days at the time of the report, was among the bottom half of its group.

Sycamore has also run into legal drama. Aeropostale last year accused Sycamore, a lender to the teen retailer, of trying to push the chain into bankruptcy to seize ownership. Sycamore successfully refuted those claims in bankruptcy court.