Four things to know about TPG NEXT

The PE heavyweight’s GP platform, which aims to back the next-generation of diverse managers, will provide both seed capital and working capital of more than a year to its GPs.

TPG, the world’s fourth biggest private equity firm according to the PEI 300, launched in mid-March a GP seeding platform focused on diverse talent.

TPG NEXT will provide “flexible growth capital and operating resources to seed, support and scale the next generation of diverse investors and entrepreneurs including women, people of colour and LGBTQ+”, according to a statement.

The platform builds on the firm’s work in prior years to build and promote a more inclusive workforce. TPG founded its diversity and inclusion council in 2015 and two years later launched an initiative to increase the gender diversity of its portfolio company boards. Since then, its portfolio companies have added more than 100 women directors and at the end of 2019, the firm expanded the focus on race and ethnicity and sexual orientation.

TPG NEXT has backed three managers thus far: Harlem Capital Partners, a venture firm which TPG had made a non-control investment in 2019; early-stage venture firm VamosVentures, which focuses on the Latinx community; and LandSpire Group, a Black-owned real estate firm. It has also partnered with the National Association of Investment Companies, a network of diverse-owned alternatives managers, to promote industry events and training.

Private Equity International caught up with Anilu Vazquez-Ubarri, chief human resources officer and a partner at TPG, to find out more.

TPG’s ‘ecosystem’ comes into play for every GP on NEXT

“We got to a point where we got tired of talking about the problem and we said, ‘we need to start doing’.” The ultimate goal, according to Vazquez-Ubarri, is to transform TPG with its diversity, equity and inclusion initiatives, as well as the industry.

“We believe TPG NEXT is an expression of what we can do to not only push ourselves within the firm, but also in the PE industry,” said Vazquez-Ubarri. “This is a natural extension of what we saw was a very clear issue – that diverse-led businesses struggle to raise capital. That’s true independent of the industry.”

With TPG NEXT, the firm thinks it can help solve the industry’s structural issues by supporting diverse talent and investing its own capital and resources, she added.

“The most important thing is we are mentoring the next generation of managers, who will eventually go and form funds that will be multi-generational. And that will really change the industry.

TPG’s ecosystem of institutional LPs, operating partners and networks are available for every manager it backs, Vazquez-Ubarri told PEI. TPG NEXT connects the GP to its institutional LPs during the manager’s capital raising efforts, helps the GP in making strategic decisions, facilitates discussions on the GP’s deal pipeline and offers its operating resources and best practice sharing, she noted.

Investments will come from balance sheet capital

All three investments are from TPG’s balance sheet. TPG NEXT is providing seed capital and also working capital of typically more than one year to the managers. Vazquez-Ubarri declined to disclose financial terms of the deals and did not comment on fundraising plans for NEXT.

PEI understands, however, that the firm is in discussions with LPs to accept third-party capital. Doing so would give the seeding platform more flexibility in the number of GPs it can back at any given time.

GP stakes firms that are targeting managers at early stages of development and which have raised external capital include SP Capital, a $200 million fund established by placement agent and secondaries advisor Sixpoint Partners that backs spin-outs, and Atypical Partner, the fund management business of Three Hills Capital Partners.

NEXT’s ownership will decrease over time

“As we step down in our existing partnerships, our ownership interest will be assumed by the GP,” Vazquez-Ubarri said. “Our terms and our whole strategy are designed to provide support, resources and exposure, and ultimately for us to get out of their way.”

“This is truly a seeding programme – our ownership is designed to step-down fund after fund, which is agreed with the GP upfront.”

She noted that the terms of its partnerships – which are mainly minority ownership positions in the GP’s underlying management company – will also depend on a manager’s strategy and the number of funds they want to raise. “Some, as they scale up, will want to go up in their cheque size and strategy.”

Even the working capital it provides is designed to enable the GP to accelerate its growth while learning from TPG’s operational structure, she added.

Vazquez-Ubarri declined to provide details on TPG NEXT’s terms with its GPs.

It will also back non-US and non-PE focused GPs

The majority of the funds TPG Next looked at, particularly at the beginning, were early-stage venture capital managers, according to Vazquez-Ubarri.

While there has been a “high concentration” on the venture side, TPG NEXT is starting to see some GPs focused on credit, as well as growth equity and buyouts, she noted. While some of these funds are also investing primarily or exclusively in diverse entrepreneurs this is not a requisite to be part of TPG NEXT’s consideration.

She declined to provide further details on the manager selection process.

However, according to a source with knowledge of TPG NEXT, most of the GPs it screened have been US-based, and the platform is also in discussions with some UK-based GPs. NEXT is understood to have between five to 10 groups that it is actively considering.