A Strategy that Works: TPG
The business acumen of big-time private equity firms never ceases to amaze me. In yesterday’s New York Times, William Alden and Michael J. De La Merced described the revised investment tactics of TPG. In the aftermath of several failed deals, TPG is marketing itself as a more nimble and humble firm. Mssrs. Alden and De La Merced capture this point in quoting co-founder James Coulter’s presentation to the Oregon Investment Council, “ In investing, you will from time to time make mistakes, but the most important thing to do is learn from the mistakes.”
TPG is highlighting its smaller, more growth-oriented investments as it attempts to create distance from some of its missteps during the frenzy of the credit bubble. In reading The Times article and going back to look at TPG’s appearances before the Oregon Investment Council, I was struck by the consistency of TPG’s business strategy rather than any fundamental change in its investment style. In other words, TPG is simply saying and doing what is necessary to advance its business interests. It’s wise for TPG executives to foreswear massive transactions and club deals, because that’s what investors want to hear. Moreover, it’s easy to make these comments because TPG doesn’t have the firepower to engage in this activity anyway. They’ve only got a limited amount of capital left in their last general fund, and they are still in the early stages of raising the next one. Their main investment vehicle at the moment is a growth-oriented fund. Therefore, growth-oriented investors are being featured. When Fund VII is eventually raised, it will have $10 to $12 billion of capital, which will put TPG back into the megadeal business. When that happens in 2015, TPG will simply change their public relations message to laud the opportunities that have conveniently appeared among larger buyouts.
TPG’s ability to get their anchor investors like Oregon and Washington State to back their efforts despite a very uneven record is truly remarkable. In defending TPG’s record at Oregon, which has invested in all of TPG’s buyout funds, David Bonderman, co-founder of TPG, told the Council that TPG had doubled their money over the years. Doubling Oregon’s money wouldn’t be an impressive feat over such a long period of time. However, as shown below, that statement is also incorrect. Nonetheless, Oregon agreed last year to extend the investment period for Fund VI and then helped to seed Fund VII with $700 million while investing $250 million in a special situations fund.
Over the years Oregon has committed $2.2 billion to eight TPG funds, with a resulting total value of $3.3 billion. As of Oregon’s last PE disclosure last September, roughly $2.2 billion had been realized, while the remainder of the value is based on an estimates of the unrealized investments. After twenty years of investing with TPG, Oregon has merely gotten back the overall amount of capital they’ve invested. While there’s nothing wrong with this picture, it is far from a sterling success.
Oregon’s decision to continue its commitment to TPG isn’t a fluke. TPG’s business know-how is further demonstrated by its success in Washington State, which agreed to invest $600 million in the new fund and $200 million in the special situations fund. Washington has committed $2.3 billion to TPG across seven funds and only received a little more that $1 billion back in actual distributions. The total value of their investments is $2.6 billion. Granted they’ve only been investors with TPG since 2003, but the returns can’t possibly come close to what Washington expected when they first signed up.
Why is TPG succeeding? Oregon, Washington, and other big pension plans have a relatively limited number of choices when it comes to large, multi-product PE firms. The big pension plans have to ladle out large amounts of capital in order to achieve their allocation targets for private equity. TPG, along with Carlyle, Blackstone, KKR, Apollo, and a handful of other large firms understand this problem. These firms are more than willing to say and do whatever is necessary to satisfy the needs of these key clients. They will continue to promise higher returns in the future (not withstanding the past), show some flexibility on fees, and say what clients want to hear. In this world, TPG will do just fine whether they make big or small investments.
Note: As CIO for North Carolina, I recommended an investment in TPG’s third fund. While I think their business acumen is second to none, I also believe they make some of the more interesting investments among the largest players in the industry.