TPG, the private equity firm led by founders David Bonderman and Jim Coulter, is poised to join its biggest rivals on public markets via a long-awaited US$1.05bn Nasdaq IPO, a deal that comes as the alternative asset management industry faces a potentially tougher year after a golden period of excess returns.
The launch of the offering on Tuesday comes after a banner year that saw TPG pump out US$1.7bn of profits in the first nine months of 2021, although rising interest rates and a choppy start to the year for US stocks has already dragged down the stock prices of listed PE peers such as Blackstone (down 7.9%), KKR (–5.2%), The Carlyle Group (–6.3%) and Apollo Global Management (–4%) in the first four trading days of the year.
Joint bookrunners JP Morgan, Goldman Sachs, Morgan Stanley, Bank of America and in-house expertise in the form of TPG Capital Markets lead a syndicate of 24 banks marketing the sale of 33.9m TPG shares at US$28–$31 for pricing after the close on January 12.
TPG's listing, which values the firm at about US$9bn, is coming off a record IPO volume year in 2021 but in aggregate those deals have lost investors 16.6% to date, while the S&P 500 is up 25% since the start of 2021.
The terms value TPG at 14–15 times forward distributable earnings of US$400m, a relatively modest number considering last year's performance. That would be a slight premium to Carlyle and Apollo, but a discount to KKR and Blackstone.
Early talk has TPG on track for in-range pricing, with investors focused on the firm’s outsized assets under management/fee growth opportunity relative to peers.
“We have taken 55 companies public ourselves, so we know choosing the right time for an IPO is critical,” said Coulter during the online roadshow presentation. “We have substantial momentum and clarity in our forward growth.”
Top of the market?
Not everyone is convinced.
"People might be willing to give TPG the benefit of the doubt given its focus on growth," said a banker away from the deal. "But the price that people are willing to pay and the multiples attributed to these assets are not the same as interest rates rise."
Coulter's comment about IPO timing is significant. Every time a major sponsor opts to do an IPO the fear/expectation is that those involved believe we are at the top of the market. If the IPO experts think this is the moment to cash in, do institutional investors know better?
History suggests PE firms do indeed time their floats very well, although in the long-term investment in a sponsor's IPO will deliver in spades.
Blackstone’s US$4.1bn IPO in mid-2007 attracted demand approaching US$50bn, but shares halved in the following eight months and were below US$4, from a US$31 IPO price, in February 2009. Shares are now at US$119.
Apollo’s 2011 IPO was widely deemed a failure as shares traded down on debut when investors in a 2007 private placement cut their losses by selling out immediately. Shares fell by nearly half in the first six months of trading but have now returned over 300% for IPO investors.
Bridgepoint – a far smaller outfit focused on the mid-market with assets under management of €30bn – completed a £907m IPO last summer on the LSE that was a success for all involved and delivered IPO investors a 40% gain by year-end. Fellow UK sponsor CVC is now also looking at an IPO, with Goldman Sachs reportedly working with the firm that has AUM of US$125bn.
Reorganisation
TPG was founded in 1992 by Bonderman and Coulter, both of whom previously worked for the family office of Texas billionaire Robert Bass before cutting their first big deal with the early 1990s buyout and turnaround of Continental Airlines. More recent successes include security software firm McAfee, whose enterprise value quadrupled during TPG's four years of ownership prior to its takeover last year.
After 30 years as a privately held partnership, TPG will adopt a new corporate shell alongside its IPO, helping to broaden its investor base, much as C-Corp conversions have aided the share prices of its public peers.
A portion of the IPO proceeds will be used to buy equity interests from insiders, though the founders are not selling stock in the offering and have agreed to restrictions beyond the 180-day lock-ups. Still, the TPG founders and senior executives could collect an estimated US$1.4bn in payments over time, reflecting tax savings the firm expects from its restructuring.
Golden period
The IPO caps a golden period that saw TPG grow AUM 81% in the past five years to US$109.1bn as of September 30 last year. Blackstone, by comparison, has US$731bn under management and Carlyle US$293bn.
Coulter spent much of the online roadshow highlighting TPG's moves into growth investing versus its traditionally more value-focused peers.
“Not all AUM is created equal and our historical focus on private equity has created a particularly strong portfolio of full carry, long-dated, high-quality capital,” Coulter said. “Growth investing is over 39% of private equity AUM but generally less than 10% at most of our public peers”.
One area TPG is light in is alternative credit, currently a hot sub-sector of PE as demonstrated by T Rowe Price's US$4.2bn purchase of Oak Hill Advisors in October.
Along with further growth in real estate and so-called “impact investing”, alternative credit may offer another source of new AUM.
“TPG has an opportunity to build a credit business from scratch,” an ECM banker told IFR.
The firm's AUM growth has translated into huge profits, though the firm’s heavy involvement in the now-slowing SPAC business contributed to its strong numbers last year.
TPG's distributable earnings of US$1.7bn on revenue of US$3.9bn in the nine months ended September 30 represented a fivefold increase from the US$319.4m profit it earned in the same period of 2020.
It plans to distribute 85% of its earnings to shareholders in the form of a dividend beginning in the second quarter.
TPG would represent the first US IPO from a major PE firm since Ares Management went public in 2014.
Despite the uncertain market backdrop, bankers also expect to see other alternative asset managers/PE firms go public this year. In addition to CVC, serial SPAC sponsor HPS Investment Partners is seen as an IPO candidate.