2 Wall Street firms have made billions betting on a hot consumer trend

A couple of private equity investors are set to make more than $US3 billion on a big bet on increased spending on pets.

Private equity firms TPG Capital and Leonard Green bought out retailer Petco in 2006 in a deal valued at more than $US1.7 billion.

They announced on Monday they’re selling it to another couple of private investors.

CVC Capital Partners and the Canada Public Pension Investment Board are acquiring it for a whopping $US4.6 billion.

When they bought Petco nearly 10 years ago, TGP Capital and Leonard Green invested less than $US800 million into the deal in cash and used debt to finance the remainder of the purchase.

Dividend recap

In 2010, they carried out a dividend recapitalization — where a company takes on more debt and returns that money to shareholders — and paid themselves roughly $US600 million.

That was followed by another dividend recap, in 2012, for roughly $US550 million.

Given the difference in what they spent for Petco and what it was sold for and the two dividend recaps, it’s safe to assume that TPG Capital and Leonard Green have made more than $US3 billion on the Petco investment.

Kevin Allison at Breakingviews estimates that the two PE firms made 4.5x times their original $US765 million investment, equivalent to $US3.4 billion.

Business Insider reached out to TPG Capital and Leonard Green for comment, but neither returned messages in time for publication.

It is clear that Petco was a multi-billion dollar winner for its private equity owners.

And, this chart proves why: Americans are spending nearly 60% more than what they were in 2006.

Pet spendingAPPA.orgAmericans spend nearly 60% more on pet products now compared to 2006, when Petco was bought out.

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