In August, TPG received approval from enough of its limited partners to extend the investment period for its $19 billion sixth buyout fund by one year, to February 2015.
While TPG has not publicly given any specific guidance as to why Fund VI has taken longer to deploy than expected (it declined to comment for this article), it wasn’t exactly the only private equity firm forced to slow its pace of activity in the wake of the global financial crisis.
As part of the agreement, TPG – led by David Bonderman – will only be charging management fees on invested rather than committed capital during the extension period, a fairly standard move with this sort of extension.
However, the firm added an additional sweetener to further incentivise LPs to approve the request: TPG will offset the management fee with 100 percent of any transaction fees on deals done during the extension period, according to LPs familiar with the situation. Fund VI’s original transaction fee offset was 65 percent.
This 100 percent offset does not affect fees on existing portfolio companies and it will not affect fees on companies acquired before the extension period begins next February, sources say.
At press time, LPs seemed to be supportive of the extension request.
“It’s the right thing for investors, it’s the right thing for the firm,” one TPG investor told Private Equity International. “It gives them another year to put some capital to work.”
While it seems unlikely that a fund manager would start investing carelessly in order to get all the capital in a fund deployed by a set date, there’s a legitimate concern among some LPs that if a manager has a lot of money to spend, an imminent deadline may have an adverse effect on borderline investment decisions. And in TPG’s case, the capital in question amounts to at least $3 billion – enough to have a serious impact on the fund’s eventual performance.
The extension also takes pressure off the firm to launch its next global buyout fund this year. Market sources have been speculating that the firm would launch Fund VII this year – but the general consensus now is that it will probably come back to market in 2014.
Delaying the fund launch could be advantageous for TPG for several reasons. It will probably mean the field is clear in terms of mega-cap firms, increasing TPG’s chances of finding room in LPs’ allocations, one source suggests.
This year, Apollo Global Management, The Carlyle Group, CVC Capital Partners and Kohlberg Kravis Roberts are all battling for capital, along with Permira and Clayton Dubilier & Rice. By next year, at least a few of these GPs should have wrapped up their fundraisings.
The extension also gives TPG more time to realise investments and improve its rather lacklustre recent performance, according to the source. Fund VI was generating a 6.7 percent internal rate of return and a 1.15x multiple as of 31 December 2012, according to the California Public Employees’ Retirement System, while Fund V, a $15 billion 2006 vintage, was producing a negative 2.9 percent IRR and a .88x multiple.
Buying an extra 12 months to invest Fund VI is no magic bullet. But it might at least mean that TPG has a more compelling story to tell when it does come to market with its next vehicle.