TSSP may seek up to $8.5bn for myriad strategies

The credit investing powerhouse would deploy capital into direct lending and various special situations and distressed scenarios.

TPG Sixth Street Partners is in market with three funds that could seek up to $8.5 billion, including a large vehicle that is contingent upon a credit market dislocation to deploy capital, according to documents from a Midwest pension fund.

The credit arm of TPG Holdings is looking to raise $1.5 billion for its TAO 4.0, $4 billion for TAO Contingent and a possible $3 billion for TPG Opportunities Partners IV (TOP IV), Minnesota State Board of Investment meeting materials showed. TOP IV has not been formed yet, and the final size may “differ materially” from the proposed number in SBI’s papers.

TSSP declined to comment.

The two TAO vehicles will let TSSP invest across three different areas: adjacent opportunities, direct lending crossover opportunities and special situations cross over opportunities. These strategies, assuming a “steady-state macroeconomic environment”, would comprise 60-70 percent, 10-20 percent and 15-25 percent of the vehicle, respectively.

The adjacent opportunities bucket includes defensive yield, positions in non-distressed entities that have “minimal correlation” to the overall economic environment, along with stressed opportunities and distressed non-control situations.

The direct lending opportunities will involve investing alongside TPG Specialty Lending, TSSP’s publicly traded business development company in the US, and TPG Specialty Lending Europe, the firm’s mid-market lending vehicle on the other side of the Atlantic. The special situations strategies will involve deploying capital with the TOP fund series, vehicles that look to deploy $25 million-$200 million per transaction.

The TOP fund series invests in corporate distress-for-control situations; asset special situations, which involve investing in underperforming or nonperforming loans from commercial banks or financial firms; and corporate dislocations, which may include overlevered companies, operational problems or structural changes in the business’s given industry.

The TAO 4.0 fund offers short-term and long-term limited partner commitment periods. LPs of the former category allocate capital for three-and-a-half years, while investors of the latter option set aside funding for five-and-a-half years. Its predecessors TAO 1.0 and TAO 2.0/3.0 raised $482 million and $7.5 billion, respectively. TAO 1.0 generated a net internal rate of return of 17.2 percent and a 1.57x multiple on invested capital, while those numbers for TAO 2.0/3.0 were 9.1 percent and 1.13x, respectively.

For TAO Contingent to begin investing, there must be a market dislocation. Once there is a final close, the fund has a three-year initial activation period, with a rolling two-year extension to be exercised at the LPs’ option. After it starts deploying capital, the fund has a three-year commitment period.

The TOP IV terms are not yet set. TOP I, which had $2.1 billion of committed capital, was a carve out from two other vehicles and posted gross returns of 26.4 percent. The $2.1 billion TOP II posted a 17.4 percent net IRR and a 1.66x MOIC, and the $3.3 billion TOP III reported figures of 10.1 percent and 1.15x MOIC.

TSSP manages $20 billion and was formed in 2009. The larger TPG operations also include platforms for investments in private equity, real estate and hedge funds.