Blue-light special at Mervyn's

Sometimes private equity real estate firms seem to invest in packs. Perhaps it's only natural—working with the same macro-economic trends and market fundamentals, certain types of investments are going to look promising at roughly the same time. In 2004 and 2005, retail buyouts were in. And with so many stores sitting on so much prime real estate, oftentimes property firms were brought in as partners to unlock the value underneath the merchandise.

In the summer of 2004, Boca Raton-based distressed specialist Sun Capital Partners teamed up with hedge fund Cerberus Capital Management, private equity real estate firm Lubert-Adler and property group Klaff Partners to purchase the Mervyn's discount retail chain from Target for around $1.65 billion. It marked one of the first high-profile deals in the sector, with the investor group acquiring 257 stores and four distribution centers spread over 13 states.

Though it was one of the first, it would not be the last. By the following spring, Toys ‘R’ Us had been purchased by KKR, Bain Capital and property group Vornado Realty Trust and discounter ShopKo would be on the auction block (eventually going to Sun Capital Partners, as well). And three-fourths of the Mervyn's buyout consortium, Cerberus, Lubert-Adler and Klaff Realty, joined together once again earlier this year to purchase supermarket and drug store chain Albertson's for $17.4 billion, one of the largest transactions ever in the private equity sector.

In the Mervyn's deal, the investor group has thus far been able to turn the company around. It has closed 62 underperforming stores—and has plans to shutter 20 more—in an effort to refocus the chain on its core markets. Rather than sell off a majority of the stores as initially planned, the new owners rehabilitated physical locations and improved the stores' product mix. In 2005, it sold and leased back the properties in separate deals involving DDR and Inland.