New Mexico rues numerator effect on TDR investment

NMSIC cut its commitment to Fund V due to the outperformance of investments in prior TDR funds, showing that even top managers are facing cutbacks.

New Mexico State Investment Council has bemoaned having to downsize its commitment to TDR Capital‘s latest fund.

Speaking at its June investment council meeting, director of private equity David Lee said that the outperformance of its existing investments in funds managed by TDR, which targets mid-market companies in Europe, meant it had to write a smaller cheque for the in-market Fund V than its target range allowed.

“The successful managers in our programme have a burden from a portfolio diversification perspective,” he said. “You have an outsized NAV for the size of your previous allocation and that ends up being an outsized portion of the portfolio.”

TDR has done “a great job” of returning capital and has been above the median in terms of distributions-to-paid-in, he added, noting that New Mexico’s investments in TDR funds III and IV have returned a combined 36 percent net IRR and 2.8x net multiple as of 31 December.

NMSIC’s board approved a commitment of €50 million to TDR V, compared with €65 million to the 2017-vintage Fund IV and €55 million to the 2014-vintage Fund III.

TDR V is targeting €4 billion, a modest step up on €3.5 billion for its predecessor. This is to maintain continuity. “We want to keep doing what we’ve done successfully in the past,” said head of investor relations Eleanor Chambers in a presentation during the meeting.

Fund V will invest in seven to 10 companies in Europe with cheques of €250 million to €750 million in size. TDR will be the largest investor in the fund with a GP commitment of 10 percent. This is likely to reach as high as 15 percent, with cash contributions coming from junior as well as senior staff, Chambers said.

TDR is targeting deals with a “clear route” to 3x returns and minimal downside. Its thesis is to target “undermanaged or underinvested” companies and grow their value through operational improvements.

The average entry multiple on deals done by funds III and IV was 8.2x EBITDA, compared with a European average for 2021 of 11.9x, according to data from Bain & Co.

New Mexico’s situation highlights the challenging fundraising market, where even top-performing funds are contending with reduced ticket sizes. In April, CEO of the Carlyle Group Kewsong Lee warned that fundraising was likely to take longer for its PE funds than its credit and secondaries funds.

“These changing dynamics are mostly driven by the record number of funds that are coming back to market much faster than LPs thought, in large part because of the success the private equity asset class has had over the last few years,” he said.