Going public

In order to give serious credence to Bonderman’s assertions, TPG would have to undertake an incredible level of expansion over the next few years. The early success of its credit business, covered in more detail in the March issue of Private Debt Investor, should provide a blueprint for that expansion, but it’s hard to believe such an undertaking would occur in the  

The Carlyle Group, Kohlberg Kravis Roberts, The Blackstone Group… all public. TPG? Still resolutely private. What’s another factor making David Bonderman’s firm different from its listed peers? It’s lagged behind private equity rivals in building out more diversified business lines.

TPG has built its a reputation as a global buyout shop. So understandably, after Bonderman (again) made a remark earlier this week about the firm thinking about going public, but “not too hard”, a lot of resulting chatter has focused on how its more recent acquisitions were languishing under oppressive debt loads, dragging down buyout fund returns.

Fortunately, the firm’s relatively youthful credit arm has bucked that trend, delivering top quartile returns and developing a strong reputation.

But its credit business is dwarfed by the buyout unit, and therein lies TPG’s problem if the firm does ever decide to list its management company.

A look at the size and level of diversification of its peers is instructive. Blackstone, Carlyle and KKR are large, diversified asset managers now, rather than specialist buyout or private equity firms. They have extensive platform offerings in credit, real estate, hedge fund and advisory products, and it’s in this area where TPG has lagged.

Despite TPG’s separate platforms for credit, venture, growth equity and its core business, private equity, its holdings are considerably less diverse than those of the smaller of the publicly traded firms like KKR ($94.3 billion AUM) or Oaktree Capital Management ($83.6 billion AUM). Blackstone’s credit affiliate, GSO Capital Partners, actually boasts a larger AUM than TPG does in its entirety.

A source with direct knowledge of TPG’s inner workings recently told Private Debt Investor that the firm tempered its plans for future growth in recent years – opting to take a more organic approach rather than buying and building new platforms overnight.

In addition to sorting out performance of it buyout funds, building out its thriving credit business – which currently has $6 billion under management, a small fraction of its total AUM – would help to make the firm more attractive to public-market investors one day: debt investing is less risky than private equity, and delivers more stable returns, helping to smooth overall performance which if too reliant on buyout performance can look lumpy.

But even then, braving the icy waters of the public markets doesn’t necessarily guarantee success, at least in share price terms. As an example, despite remaining stable and expanding assets under management over the six years that followed its initial public offering, Blackstone only began trading above its IPO price of $31 per share in December (shares were trading at $33.54 at press time). Blackstone’s timing was impeccable, or terrible, depending on whether you’re an employee or an investor – it priced its IPO at the very top of the market.

So TPG may one day go public, or it may not. The firm’s co-founder David Bonderman reportedly said, “at the end of the day, everybody will go public”.