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DALLAS (Reuters Breakingviews) - TPG Capital is getting crafty with its investment in online homemade-goods dealer Etsy. The private-equity firm run by David Bonderman and James Coulter, along with partner Dragoneer Investment Group, took an 8 percent combined stake in the $1.6 billion company in the midst of a shakeup. Buying passive equity stakes isn't TPG's core competence. So TPG's creativity is a testament to the challenges of the buyout business, where money is plentiful but asset prices are lofty.
Etsy was a darling when it went public two years ago. The Brooklyn-based e-commerce firm carved out a niche, targeting artists and crafty types that wanted a more personal sales experience than eBay or Amazon.com offered. Revenue grew more than 2.5 times in the two years leading up to its public debut. EBITDA increased nearly as much, suggesting it wasn’t overspending for that growth. Etsy stock jumped more than 80 percent from its $16 pricing on its first day of trading.
The top line has continued to grow, and Etsy’s business made solid progress in pushing users to its mobile app. But costs got out of hand as Etsy kitted out its fancy new headquarters in Dumbo. The stock fell to half its price after the IPO. Etsy trades at roughly 2.2 times revenue, about half eBay’s valuation. Earlier this month, shareholder Black-and-White Capital pushed for a sale. Etsy has pledged to sack 80 workers, 8 percent of its workforce, to cut costs and replaced the chief executive and chief financial officer.
These are all the steps TPG would probably have taken if it acquired all of Etsy for itself. The difference is that TPG would have had control over management, and typically uses debt to boost returns in an LBO. The San Francisco-based firm has a fund that makes these sorts of investments, but it is using cash for this deal from its traditional private-equity fund.
It's probably not the last time TPG will need to get creative to deploy its $10.5 billion of buyout funds. After all, with $820 billion in dry powder at private-equity firms at the end of 2016, according to research group Preqin, there's lots of cash hunting for a cozy home. It will take a lot more than a stake in the premier purveyor of knit caps to dent that pile.
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