FEATURE: Real estate Bondo

The legendary buyout firm TPG is going into property. Robin Marriott examines how the firm famed for deals such as Continental Airlines, is becoming a new force in private equity real estate. PERE Magazine September 2010 issue

Texas Pacific Group is a legendary name among buyout groups. Founded in 1992 by trio David Bonderman, James Coulter and William S. Price III (now retired) it is a giant in private equity. Which firm famously bought Continental Airlines out of Chapter 11 in 1993 and turned it around? That was Texas Pacific. More recently, high-profile deals include its investment in Burger King in 2002, film studio company Metro-Goldwyn-Mayer in 2004, and casino group Harrah’s Entertainment in 2007.

TPG headquarters

Now known as TPG Capital, the firm rarely stays out of the spotlight. It is the world’s fourth largest private equity firm, according to PERE’s sister magazine Private Equity International with $45 billion of capital raised in the last five years alone. To put that in context, the world’s largest private equity real estate platform, The Blackstone Group, raised $24 billion over the same time frame.  

But what makes this ubiquitous private equity firm of interest to readers of PERE is that TPG is getting into real estate.


A scan of recent announcements shows this clearly. Last October for example, the Fort Worth, Texas-based firm teamed up with Starwood Capital Group, Perry Capital and WLR LeFrak to buy $4.5 billion of US real estate construction development loans originated by Corus Bank and taken over by US banking regulator, the Federal Deposit Insurance Corporation (FDIC). So far this year, it has announced a $750 million property joint venture with Los Angeles-based real estate developer Rick Caruso, targeting underperforming retail centres on the west coast of America, and a €900 million joint venture with Ireland’s Green Property to acquire assets in the UK and Ireland.

Over the years, several large buyout firms have been unable to resist the lure of real estate, and they have entered the asset class in various ways (see Private equity and real estate, p. 33). Private equity firms such as The Carlyle Group and The Blackstone Group have raised dedicated real estate opportunity funds, while others such as Kohlberg Kravis & Roberts have opted to invest through private equity funds. TPG, for the moment, is doing the latter.

In order to get into property, TPG is investing out of its two latest flagship buyout funds, the $15 billion TPG Partners V  fund and TPG Partners VI. More specifically, what the firm is doing is deploying LP equity out of its large mainstream private equity funds, and then marrying up this equity with that of expert real estate investment firms and operators, such as Starwood Capital, Rick Caruso and Green Property, in order to buy assets.

According to sources, the deal with Starwood was funded by both TPG Partners V and VI, while the equity for the partnerships with Caruso is coming out of TPG VI alone.
The fact that TPG VI is the fund investing in real estate is potentially sensitive and not something that TPG wants publicised. After all, TPG VI is the grand daddy TPG vehicle which raised a monster $18.8 billion in 2008, but has attracted media attention for some negative reasons. Slow deal activity led TPG to voluntarily cut the size of its fund by a reported $1 billion at the end of 2008. In 2009, the firm then told investors it would refund $20 million of fees as part of that acknowledgement. Basically, it found it difficult to deploy its plentiful capital. Thus, the move into real estate has led some cynics to wonder whether this is less of a well-crafted visionary move into an asset class than a way to blast through $1 billion of equity.

Cynics might say
this is indicative
of the fact that
there’s not a lot of
opportunity to put
an $18 billion fund
to work, but if you
look at the details,
it shouldn’t seem
so troubling
to investors.


There is little hard evidence of TPG having identified property as a hot area during the fundraising stages. That said, in an abstract prepared by consultant Hamilton Lane in March 2008 for Los Angeles City Employees Retirement System (LACERS), Hamilton Lane talks about how the fund would seek investments in three major categories: steady state buyouts, transformational buyouts, and off the beaten path buyouts – transactions involving innovative or contrarian sourcing and or structuring. The way it has partnered up with real estate firms might count as innovative sourcing.

But then again, does it really matter?

While many private equity fund agreements limit the sponsor’s ability to invest in real estate, TPG VI is under no such restriction.
There is also a valid counter argument to the charge that TPG is somehow wantonly putting its capital to work outside areas of core competency.

“I don’t think it is that far of a stretch,” says one former TPG employee. “Cynics might say this is indicative of the fact that there’s not a lot of opportunity to put an $18.8 billion fund to work, but if you look at the details, it shouldn’t seem so troubling to investors.”

No stranger to real estate

The source argues that while TPG does not have a big experienced real estate team as such, it does have senior deal guys – co-founders Bonderman and Coulter included – that are steeped in distressed real estate investing.

Also, the firm is used to buying operating companies backed by a high degree of real estate assets. For example, TPG acquired British department store Debenhams alongside CVC Capital Partners for £1.7 billion in 2003 and subsequently sold and leased back those stores to refinance the deal. Myer, the Australian department store chain, and Harrah’s Entertainment are further examples of real estate-intensive portfolio companies that TPG has acquired.  

Moreover, TPG is absolutely no stranger to distressed property investing. In the early 1990s it was buying loans from the Resolution Trust Corporation (RTC) and was smack bang in the vanguard of opportunistic real estate investing at the time of its birth in 1992.

In fact, in 1993 TPG teamed up with Colony Capital to buy assets with a book value of $1.7 billion from the RTC. The assets included residential and commercial lots, unfinished homes, suburban ranches and raw land in California and Arizona, according to the Dallas Morning News.

In 1998, the Houston Chronicle related how Bonderman had made money picking up the pieces of failed savings and loans, and depressed Sun Belt real estate.

David Bonderman 

Apart from Bonderman and Coulter, the most senior dealmaker with real estate experience is TPG’s partner, Kelvin Davis.

Davis, who is head of the firm’s North American buyouts group (see TPG’s property player, p. 32) actually co-founded Los Angeles-based private equity real estate firm Colony Capital with Thomas Barrack in 1991 and served as president and chief operating officer for about 10 years until joining Bonderman at TPG. James Gates is another TPG partner with a real estate background. In his fifties, and seven years older than Davis, Gates worked at Barry Sternlicht’s Starwood between 1992 and 1995 as an executive vice president responsible for all capital raising functions.

Kelvin Davis

So TPG employs alumni of Starwood and Colony Capital – both of which TPG has teamed up with on real estate deals. 

TPG declined to be interviewed for this article, saying it was not ready yet to talk about its real estate strategy. However, it is interesting to note what Bonderman once said about their investment strategy. In 1996, the Dallas Morning News quoted an associate of Bonderman’s as saying: “Texas Pacific likes to target industries going through some sort of transition: changes going on within the industry, pressure from the outside. The theory is that a dynamic industry allows for the most dynamic investments.” Sixteen years after that article was written, Bonderman could well be describing real estate.

TPG is attacking the asset class in various ways. It has not been able to hire a senior real estate team, so instead it is teaming up with trusted allies to buy loans, and forming investment partnerships with experienced real estate operators in areas it thinks it could use such a firm.

It also appears keen to swallow up property-related companies, even entire real estate fund management platforms. In July, it was named by the Wall Street Journal as among several firms eyeing Morgan Stanley Real Estate iInvesting and has been cited as a possible buyer of ING Real Estate Investment Management. TPG is also reportedly among the bidders for Anabuki Construction Inc, a Japanese apartment developer that failed last year. In summary, TPG seems to be interested in investing in property whether that be direct assets, loans, property companies or fee earning platforms.

Partners in real estate

There are certainly some sizeable opportunities out there. For example, in the UK there is the £3 billion (€3.6 billion; $4.7 billion) worth of real estate loans by the nationalised British bank, Royal Bank of Scotland.
For such opportunities, TPG has formed a partnership with Dublin-based Green Property, called Green TPG Partners.  

Green Property, a mid-sized private Dublin-based property firm (see Greening TPG, p. 34), is now the conduit to UK and Irish property assets for the Dallas firm. Together they think they could partner with financial organisations such as UK and Irish banks when it comes to their real estate loans books.
TPG can source opportunities through its in-house dealmakers such as Dag Skattum, but at the same time Green brings local real estate operational expertise as well as deal-sourcing capability. Not only can it stabilise and add value to assets, the Dublin-based firm is particularly useful when it comes to opportunities stemming from troubled Irish banks that lent aggressively in the bull-run and whose assets are now destined for Ireland’s bad bank, the National Asset Management Agency (NAMA).

LPs don’t want to
pay fees upon fees,
but at the same
time they recognise
that Green Property
can bring different
things to the party


According to one fund formation lawyer PERE spoke with, TPG’s partnership with Green is quite unusual. In his European experience, a private equity firm would more typically invest alongside a partner in a specific deal, but this is a longer term strategic commitment. Green would earn an asset management fee and carry.

The way partnerships are usually drawn up, however, one would expect to see Green promising to offer TPG the right of first refusal on deals.

It appears that each deal needs sign off from TPG and Green at the joint venture level with the source saying he expected to see a key man clause so that TPG could terminate the agreement should either Green chairman Stephen Vernon or managing director Pat Gunne leave.

But the more controversial issue would be about fees and promote.
Generally there would be a restriction in fund documentation preventing a private equity fund from investing in another commingled fund. The partnership with Green Property doesn’t quite look like a commingled fund, but the risk is still that investors might have a lower net return because of the  extra level of fees being paid to Green.

Another real estate expert that has examined this kind of structure in Europe said: “LPs don’t want to pay fees upon fees, but at the same time they recognise that Green Property can bring different things to the party.”

The other issue raised by TPG investing in real estate is tax. Experts point out that real estate investment often presents unique tax considerations for investors, both in terms of the actual taxation of the investment  and associated  tax reporting obligations. However, Christopher Roman, a tax partner at law firm Clifford Chance in New York, says: “Fortunately, most private equity fund agreements provide the sponsor with the flexibility to structure real estate-related investments in a manner that meets the tax needs of their various investor classes, including non-resident and tax-exempt investors.”
In the final analysis, the most important issue for LPs is not how TPG is getting into real estate, as long as the fund overall performs well.


As the former TPG employee says, TPG Partners VI is an $18.8 billion fund, and real estate is likely to represent just a small proportion of the equity put to work across the world. What is most important is that TPG avoids more blow ups like the write offs suffered by investing in US bank Washington Mutual. TPG’s $1.35 billion investment in WaMu reportedly evaporated when federal regulators seized the lender in September 2008 and sold it to JPMorgan Chase for $1.9 billion. 

So far in its lifetime, TPG has built an apparently enviable track record, at least according to the abstract written by advisor Hamilton Lane for its client, the Los Angeles City Employees Retirement System in 2008. It said TPGs funds had delivered a net 27 percent IRR and 2x return multiple from $21 billion of realised proceeds over 24 years. On a cautionary note it also said the GP had a high write-off ratio of 19.3 percent, higher than the majority of its peers in the mega buyout space.

Whether TPG’s real estate deals punch the lights out and whether it goes on to raise its own real estate fund remain to be seen. For now, the global private equity real estate can welcome a powerful player into its midst.