TPG is reborn … again

Raising more than $10 billion is not to be sniffed at, even in this buoyant market. Indeed only a handful of the world’s leading private equity firms can boast this feat in the last 12 months.

Yet some noses may have wrinkled slightly when TPG closed its seventh flagship fund in early May on $10.5 billion. A period of 21 months spent on the road at a time when some competitors (eg, Warburg Pincus, Advent International) have apparently been raising money for fun, speaks of a marketing process that must have been far from straightforward.

It is no secret that TPG has hit significant potholes in recent years. Most notably, as with other mega-firms, it has seen some GFC-era deals go spectacularly awry. Two that spring to mind would be TXU (now Energy Future Holdings), which collapsed into bankruptcy almost erasing the firm’s investment, and Washington Mutual, the biggest US bank failure when it collapsed in September 2008.

Its TPG Partners V, which closed in 2006 on $15.3 billion, is showing mixed results. It had a 4 percent net internal rate of return and a cash multiple of 1.2x as of 30 September, according to the California Public Employees Retirement System.

And like other firms of its stature and era, TPG has been under pressure to demonstrate a clear succession plan. With the appointment of Todd Sisitsky as the firm’s managing partner and head of North American private equity last year, this issue seems to have been put to rest.

In terms of investment performance, Sisitsky tells Private Equity International that post-financial crisis the firm has been successfully focusing on value creation in the portfolio. “We had a tremendous amount of portfolio appreciation over the last three to four years,” he said following the fund close. “Driving growth: that’s what we’ve been good at; that’s what we’ve been doing for the last six or seven years.” 

According to data from online private equity marketplace Palico, Fund VI had an IRR of 11.2 percent and was generating a return of 1.5x, as of December, against a benchmark average of 10.8 percent IRR and a multiple of 1.5x for funds of a similar vintage. Back in December 2012 the same fund was returning an IRR of just 7 percent and was at a cash multiple of 1.1x.

And what of the fund size? It seems like a comedown to raise a fund a little over half the size of its predecessor. (But then any fund will look small compared with the $19 billion TPG Partners VI, the largest ever raised.)

The fund size, says the firm, at $10.5 billion, was matched to the market opportunity. TPG has refined its approach to rule out mega-deals in the $10 billion-plus category – such as TXU acquired for $48 billion by a group including TPG – and focus on deals in its core sectors in which it can “bend the curve on performance”, according to a source with knowledge of the firm’s strategy.

And anyone who might sniff at a smaller fund also needs to take into account the capital raised across the TPG platform, totalling “over $45 billion and generating strong momentum in the wake of the financial crisis”, says Jim Coulter, co-founder and co-CEO.

TPG has never been afraid to adapt to changing market conditions. Once upon a time it was characterised as a turnaround specialist, then a large buyout shop. LPs will be watching with interest as it seeks to cement its credentials as a global growth player.