By Juliet Chung 

Hedge fund Darsana Capital Partners recently wrote down its investment in Juul Labs Inc. by more than a third and now holds it at a price that values the e-cigarette company at $24 billion, said people familiar with the matter.

The New York firm is one of a number of hedge funds that rode Juul to big gains last year on the back of a December deal by tobacco company Altria Group Inc. that instantly made Juul one of the most valuable startups in the U.S.

Juul doubled to a $38 billion valuation in the span of six months last year.

But a drumbeat of negative developments last month have clouded the company's prospects.

They include a proposed federal ban on vape flavors that make up 80% of Juul's domestic sales amid continued growth in youth vaping, a decision by Walmart Inc. to stop selling all e-cigarettes in its U.S. stores, and investigations by the Federal Trade Commission, the Food and Drug Administration and several state attorneys general into Juul's marketing.

A mysterious vaping-related lung illness the Centers for Disease Control and Prevention estimates has sickened more than 1,000 and resulted in 18 deaths has also cast a chill over the industry. The CDC has recommended people stay away from vaping altogether for now and has singled out THC-containing products specifically.

Juul investors are facing more than a billion in potential collective losses this year, according to some estimates.

A Juul spokesman said, "We are focused on earning the trust of regulators, policy makers and other stakeholders...and supporting and complying with FDA's final effective flavor guidance."

Besides Darsana, investors include Capital Group, which invested in Juul through one of the biggest mutual funds in the U.S., Coatue Management, D1 Capital Partners, Fidelity Investments, Marianas Fund Management, Tiger Global Management and funds of funds Morgan Creek Capital Management in Chapel Hill, N.C., and Private Advisors in Richmond, Va., said people familiar with the matter.

A $150-a-share dividend paid out to investors in December as part of the Altria deal means many investors are still up overall, even at a $24 billion valuation for Juul. That includes Darsana, said people familiar with the matter. Recent investors Altria and mutual-fund complex Capital Group, which bought most of Fidelity's stake earlier this year in a deal that valued Juul at $38 billion, would fare among the worst.

Spokesmen for Altria and Capital Group declined to comment.

Juul helped boost the returns of its hedge-fund investors last year in a generally tepid year for the industry. It made up nearly half the 14% returns of Tiger's hedge fund last year and took D1 from a slight loss to a 5% return, said people familiar with the matter.

It contributed more than half the returns of Darsana, which posted an 11.9% gain last year, said people familiar with the matter. Darsana also has a special-purpose vehicle dedicated to Juul.

The supercharged gains last year by hedge funds that had invested in Juul drew envy from some other funds, and seemed to be a stark example of the benefits of venturing into private markets. Juul drew a bevy of other investors as well, including Stanley Druckenmiller, Robert Pohly of Samlyn Capital, Tao Capital Partners, the family office of Juul director Nicholas Pritzker, Jeffrey Lin of Sculptor Capital Management, previously known as Och-Ziff Capital Management, and the Wolfson family, a New York real-estate family that invests in hedge funds.

Investors have said they were drawn to the prospect of disrupting Big Tobacco and helping to finance a safer way for adults to get their nicotine fix, as opposed to cigarettes that would expose bystanders to secondhand smoke.

But as the narrative around the company has changed to one focused on Juul's popularity among youth and the growing addiction of a new generation to nicotine, it has become a lightning rod for controversy.

On a conference call with clients in July, a partner at Bay Area hedge fund Light Street Capital cited the firm's decision not to invest in Juul to highlight its comfort with another investment, Unity, a development platform that aids in creating videogames and apps.

The partner said Light Street hadn't invested in Juul for ethical reasons related to minors vaping, said people familiar with the call, but that it had no concerns around the ethics of investing in Unity.

Questions about the future of Juul and vaping regulations prompted Altria and Philip Morris International Inc. to call off talks about a potential merger last week.

Darsana was founded by Anand Desai, a onetime analyst at Donaldson, Lufkin & Jenrette who later was a partner at the now-closed hedge fund Eton Park Capital Management. Darsana has said it is still bullish about Juul in the long term, saying increased regulation of e-cigarettes should clear out illicit products and benefit Juul, according to people familiar with the matter.

Juul's chief executive abruptly stepped down last week, and the company said it would suspend all product advertising in the U.S.

Juul has said its new CEO, Altria executive K.C. Crosthwaite, is reviewing all practices and policies.

--Jennifer Maloney contributed to this article.

Write to Juliet Chung at juliet.chung@wsj.com

 

(END) Dow Jones Newswires

October 04, 2019 05:44 ET (09:44 GMT)

Copyright (c) 2019 Dow Jones & Company, Inc.
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