The evolution of TPG

In the buyout world, TPG Capital used to be the gold standard.

In 2006, The Oregon Investment Council (OIC) voted to commit $600 million to TPG Partners V and various co-investment opportunities. TPG had an enviable track record. Through 31 December, 2005, the firm had netted a 22.5 percent return and 1.7x total value multiple.

TPG Partners V went on to hold a $15.3 billion final close – almost three times the amount raised for Fund IV. The firm held a $19.8 billion close for its successor vehicle on 8 September, 2008 – one week before Lehman Brothers filed for Chapter 11 bankruptcy protection.

The years leading up to the financial crisis coincided with TPG’s decision to pursue large, heavily leveraged deals, a decision that led to the firm’s investments in Energy Future Holdings and Caesars Entertainment, both investments notable for their underperformance. The end result has been disappointing to say the least.

Fund V was netting 0.4 percent return as of 30 September, according to the OIC’s 29 January meeting materials. Fund VI had generated just 7.8 percent as of the same date.

“While hindsight is always 20/20, it is worth remembering the market sentiment in 2006 and 2007. Famously termed ‘the Golden Age of Private Equity’ at the time, successful private equity firms had high investor demand, enthusiastic investor sentiment, incredibly accommodative debt markets and a wide-open M&A market,” wrote Oregon’s investment staff in a memo included in its 29 January meeting materials. “[TPG] acknowledges that its investment strategy during the 2006-2008 timeframe was not successful.”

Despite TPG’s poor performance, Oregon elected to commit a whopping $950 million to the firm at the 29 January meeting. Instead of investing solely in the firm’s buyout-related strategies however, $250 million of that total went to the TPG Special Situations Partners Adjacent Opportunities fund, which will provide TPG’s special situations platform with flexible capital to pursue deals that exist outside its Opportunities Partners Funds (TOPS) and its Specialty Lending mandates.

That commitment is just one of many TPG Special Situations Partners (TSSP) has received recently. In February, The New Jersey State Investment Council cleared the way for a separate account that will invest a portion of its capital alongside TOPS funds and Specialty Lending mandates. Several LPs recently announced commitments to TPG Opportunities Partners III – targeting $2.6 billion with a $3 billion hard-cap. The vehicle is oversubscribed and was expected to hold a close last month.

Those commitments are well deserved. While TPG’s flagship buyout funds flounder, its credit platform delivered consistently strong performances since Alan Waxman and Goldman Sachs’ former special situations team joined to lead the effort in 2009. Joshua Easterly, also a former Goldman partner, joined a year later and is now co-CEO and co-CIO of TPG’s specialty lending business.

As of 30 June, TPG’s second opportunities partners fund had netted a 23 percent IRR and 1.12x multiple, according to New Jersey documents. A 2009 vintage fund had netted 22 percent and 1.46x. TSSP’s returns have contributed to an upswing for Partners VI, which was used to fund the team’s investments prior to the launch of the TOPS vehicles. Partner VI’s performance improved by 36 percent last year, according to a source with knowledge of the fund.

“It’s a growing part of the business. [The firm is] looking to grow more slowly and organically. It was five years ago those guys joined, and now they have $6 billion under management,” the source tells Private Debt Investor. “It’s steady as opposed to going out and buying a huge platform.”

That approach has helped drive returns, which has contributed to LP interest.

“They’ve got a European focus but they’re doing domestic work as well – we think there’s still some opportunities to be had. There’s good potential for finding inefficiencies in Europe,” a spokesperson for one LP tells Private Debt Investor. “If you look at their track record, they have always been first or second quartile.”

While the amount of capital raised by its credit vehicles represents only a fraction of what TPG is targeting for its next buyout fund (reportedly $10 billion), the recent success of its credit strategies should bolster the firm’s reputation with LPs when it comes to launching future fundraising efforts.