TPG Inc. (NASDAQ:TPG) Q3 2023 Earnings Call Transcript

TPG Inc. (NASDAQ:TPG) Q3 2023 Earnings Call Transcript November 7, 2023

TPG Inc. misses on earnings expectations. Reported EPS is $-0.30624 EPS, expectations were $0.35.

Operator: Good morning and welcome to TPG’s Third Quarter 2023 Earnings Conference Call. Currently, all callers have been placed in a listen-only mode and following the management’s prepared remarks, the call will be opened up for your questions. [Operator Instructions] Please be advised that today’s call is being recorded. Please go to TPG’s IR website to obtain the earnings materials. I will now turn the call over to Gary Stein, Head of Investor Relations at TPG. Thank you. You may begin.

Gary Stein: Great. Thanks Angela and welcome everyone. Joining me this morning are Jon Winkelried, Chief Executive Officer; and Jack Weingart, Chief Financial Officer. I’d like to remind you this call may include forward-looking statements that do not guarantee future events or performance. Please refer to TPG’s earnings release and SEC filings for factors that could cause actual results to differ materially from these statements. TPG undertakes no obligation to revise or update any forward-looking statements except as required by law. Within our discussion and earnings release, we’ll be discussing certain non-GAAP measures on this call that we believe are relevant in assessing the financial performance of the business. These non-GAAP measures are reconciled to the nearest GAAP figures in TPG’s earnings release, which is available on our website.

Please note that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any TPG fund. Looking briefly at our results for the third quarter, we reported GAAP net income attributable to TPG Inc. of $15 million and after tax attributable earnings of $196 million or $0.56 per share of Class A common stock. We declared a dividend of $0.48 per share of Class A common stock which will be paid on December 1st to holders of record as of November 17th. With that, I’ll turn the call over to Jon.

Jon Winkelried: Thanks Gary. Good morning everyone. I want to start by acknowledging the recent tragic events and continued loss of life in the Middle East. We strongly condemn the terrorist attacks against Israel and are deeply saddened by the ongoing humanitarian crisis in the region. We’re focused on supporting our colleagues and their families and our thoughts are with all who have been impacted by these terrific events. Turning to earnings, it’s been a busy and productive quarter at TPG. We remain highly focused on our core business and are excited about the progress we’ve made across investing, capital formation, and organic initiatives. At the same time, we’ve made substantial progress on integrating Angelo Gordon into our firm.

In my comments today I’ll begin with a brief update on the AG transaction and then share some highlights from across our business. We closed our acquisition of Angelo Gordon on November 1st. Now, as one firm, we’ve strengthened our position as a scaled global alternative asset manager with six investment platforms, totaling $212 billion of AUM as of September 30. This strategic transaction marks an important and exciting milestone in TPG’s evolution, providing us with several complementary business lines as well as additional levers to accelerate growth. We believe the addition of Angelo Gordon, together with our differentiated deal flow and strong investment track record, puts us in an advantaged position to capitalize on a number of long-term secular trends shaping the alternatives industry today including; one.

a desire amongst the largest institutional LPs to allocate more capital to a shortness of scaled GPs who can partner with them across multiple asset classes. Two, in the important private wealth channel of growing demand for alternatives, especially in semi-liquid structures and yield-oriented asset classes like credit and real estate. And three, in the insurance sector, a strong interest in partnering with alternative managers that offer differentiated credit capabilities. Additionally, our new credit capabilities expand the set of solutions, we’re able to offer the companies we invest in which furthers our ability to structure unique and creative partnerships. This is particularly valuable given our history of leveraging our sector themes and geographic depth across business units and strategies.

Although the transaction process a few days ago, we’re already beginning to see the benefits of our strategic combination. For example, in capital formation, we’ve made key introductions among our highly complementary client bases with only 10% overlap, across approximately 900 combined institutional LPs. A number of these clients are in active dialogue with us to broaden and deepen their commitments, given our expanded set of strategies across the risk return spectrum. Additionally our dialogue with insurance clients has fundamentally shifted. We are now able to have more targeted and deliberate discussions, given our multi-strategy credit capabilities. As discussed, we believe there is significant growth potential for us in the insurance space.

On the deal front, we’re seeing the positive impact, of combining our intellectual capital and distinctive sourcing engines. Our investment teams are already engaging with our other collaborating on shared ideas and identifying opportunities to potentially pursue sizable transactions together. We have also been working in a very rigorous and systematic way, to identify and prioritize joint growth opportunities. This entails launching new products that leverage the expertise and intellectual property of our combined platforms. We’re evaluating compelling opportunities in areas that are natural extensions of our business. And we look forward to sharing more details with you overtime. Next Wednesday November 15th, we’ll be hosting a key-gen with TPG sell-side analysts to dive into AG’s business in detail.

In connection with this, we will publicly share a comprehensive set of materials on our website. We look forward to introducing TPG AG’s deep bench of talent and differentiated investment style, portfolio construction and growth drivers across its strategies. Now I’ll spend some time discussing, how we’ve been driving growth and executing on our core business over the past quarter. We continue to make progress on our fundraises with $3.4 billion of capital raised in the third quarter, including successful closes in TPG Capital IX, Healthcare Partners II and Asia VIII. Each of our flagship campaigns remains on track to surpass the commitments of its predecessor. And we continue to have high-quality dialogue with clients, as we work towards final closings.

In addition to fundraising, our investment teams have been busy across a number of dimensions, including pursuing attractive exits, driving performance in our portfolios and deploying our significant dry powder into new opportunities. While we continue to see strong top line growth and stable margins across our portfolio companies, value creation for the quarter was relatively flat, as solid performance was largely offset, by multiple compression, Jack will provide more details on both capital formation and value creation in his remarks. In terms of realization activity I’d like to highlight two, notable liquidity events. During the quarter, we closed the sale of Creative Artists Agency or CAA, one of the world’s leading entertainment and sports agencies to Artemis, The Investment Company by François Pinault.

We first invested in CAA 13 years ago. And over the course of our ownership, EBITDA grew more than seven-fold. In 2021, we sold CAA from our communal fund into a single asset continuation vehicle, which enabled us to return capital to TPG Capital six investors, while continuing to partner with the company through its next leg of growth. We believe it was one of the largest vehicles of its type to be raised at the time and our recent exit, which generated over two times our money in two years is one of the most successful examples of a continuation of vehicle monetization to-date. In aggregate, both TPG Capital six investment and the continuation vehicle. CAA generated $2.4 billion of gains. It is a cornerstone transaction and our long and successful track record investing behind the secular tailwinds of media and content creation.

We’ve built a unique ecosystem in the space and we believe there will be many opportunities to leverage our capabilities going forward. In our Asia business during the third quarter, we successfully completed the IPO of RR Campo a manufacturer and seller of branded electrical wires and cables in India. The IPO was very strongly received with high-quality interest from both domestic and international loan-only investors. The stock has performed well and is currently trading up 36% from the IPO price. We partially monetized our stake at attractive valuations highlighting the continued strength of TPG’s franchise in India. Turning to deployment. Our sector specialization and long-term thematic investment approach have continued to generate differentiated opportunities for us.

In particular, our deep industry expertise and proven ability to accelerate portfolio company growth have positioned TPG as a partner of choice for many corporates. This has led to bespoke and often proprietary carve-outs, as well as other structured partnerships over many years. Despite our general caution around the broader market today, we continue to find these types of compelling opportunities in spaces we know well. And these are investments we would pursue at any point in the cycle. In the third quarter, we deployed $5.5 billion of capital across our platforms a significant increase over the activity levels in the first two quarters of this year and our pipelines remain robust. In TPG Capital, we closed the acquisition of Nextech a leading provider of electronic medical records practice management payments and related solutions for specialty health care providers.

Nextech follows our thematic focus on health care provider efficiency tools and patient payments, which is reinforced by our successful investment in WellSky. The deal team was combed by investors from both our health care and software and enterprise technology teams, which reflects the collaborative culture we’ve built. In TPG Capital Asia, we received shareholder approval last week to take InvoCare Private in Australia. TPG has spent many years tracking InvoCare, we only add scale vertically integrated provider of funeral services in the region. We strategically acquired an initial public stake in the company earlier this year as a key step towards the eventual take private of the company. Our Impact Platform, which invests under the Rise brand continues to be a significant differentiator for TPG and positions us well as we move into the next decade of investing.

Our Rise, in Rise climate funds have been built to address changing societal needs while providing non-concessionary and competitive financial returns. As a testament to the franchise our team has built, the Rise platform was proud to be recognized recently our Fortune’s Change the World list for the second consecutive year. This annual list acknowledges companies that have had a positive societal impact through activities that are part of their core business strategy. TPG continues to be the only global multi-strategy alternative asset manager to earn this distinction since the list inception. We have maintained a steady investment pace in our impact platform. I’ll discuss some recent examples. Rise and Rise climate agreed to invest in Tata Technologies, one of India’s largest automated and aerospace-focused engineering R&D service providers, aiming to decarbonize transportation.

This investment represents our second partnership with the Tata family, the first being with Tata Motors passenger electric vehicle business. Given the strong relationship we’ve developed with Tata, we were able to structure this opportunity on a proprietary basis, ahead with a potential public offering. Our rise phones also agreed to acquire a majority stake in A-Gas, a global leader in the supply and life cycle management of refrigerant gases with first-class recovery reclamation and repurposing processes. This built on Rise thematic focus on supporting the circular economy and advancing the adoption of clean molecules to meet global decarbonization targets. Another particularly compelling area of investment opportunity for us today is real estate, where global markets have entered into a highly unusual period.

Certain parts of the market are experiencing significant disruption, driven by rapid step function changes in interest rates and valuations, as well as fundamental underlying changes to sectors such as office and retail. From ours, this is creating distinctive opportunities to acquire assets that would not typically be available for sale. We believe our real estate platform is particularly well suited for this environment, as we raised nearly $7 billion for our current flagship opportunistic fund TREP for over a year ago. We intentionally moderated our investment pace in anticipation of more attractive opportunities and we are beginning to see them now. During the quarter, TREP completed the $1.5 billion transaction in partnership with Digital Realty Trust to capitalize a portfolio of high-quality data centers in Northern Virginia with more than one million square feet in total.

We also recently announced a $1.5 billion tender offer to take Intervest Private, a leading Benelux-based logistics REIT. The team has spent a number of years building conviction around the compelling market fundamentals of industrial real estate in the region and developing a relationship with the company’s management team, with stock trading down approximately 50% of its peak value. We leveraged our knowledge and expertise to approach Intervest about a take private, resulting in this sizable transaction. In addition to our existing opportunistic equity funds, we have launched our new real estate credit strategy, TRECO the combination of downward pressure on real estate values, reduced lending appetite, and elevated borrowing cost has created what we believe to be one of the most interesting investing environments we have seen in at least two decades.

We believe we are well positioned to take advantage of this, given the broad reach of our global real estate and credit investment platform. Jack will provide an update on our fundraising for TRECO strategy in a few minutes. Together with TPG AG Real Estate, we now have a combined real estate platform totaling $36 billion of AUM, as of September 30 and we’re well positioned to play offense for several reasons. We have combined dry powder of $15 billion. We invest in defensive sectors, where we have long-standing expertise and the ability to collaborate with other TPG platforms in areas such as content production and life sciences. With TPG AG, we have expanded our geographic footprint to include Asia. From our perspective, these markets are fragmented and particularly hard to enter from a standing start.

And we believe the two decade-long focus of Angelo Gordon in markets like Tokyo and Seoul is incredibly valuable in advantageous. And we have added a net lease capability, which provides attractive growth opportunities to a hybrid for the financing and real estate markets. Before I wrap up, I also want to spend a few minutes on our credit business. As we’ll discuss in more detail next week, we’re entering the credit space with a diversified multi-strategy and scaled platform that’s well equipped to capitalize on the significant tailwinds in this asset class. TPG AG’s activity and performance over the last several quarters have reinforced our thesis in several ways. Let me share a few examples. Asset-backed lending and specialty finance strategies have become an increasingly important part of the private credit ecosystem.

Current market volatility, especially as it relates to concerns around corporate earnings has accelerated demand for products that lend against cash generating stable assets. Additionally, the regional banking crisis earlier this year has further enhanced interest in the space. In 2021, TPG Angelo Gordon identified a significant opportunity and raised over $1 billion for our first time asset-backed lending fund. Since activation, the team has already deployed over half of the fund’s capital into more than 20 transactions. We expect to substantially scale this strategy over time. TPG AG Credit Solutions, our corporate credit strategy is also taking advantage of the current market dislocation with its flexible mandate and the ability to pivot between public and private markets.

The platform invested more than $750 million in the third quarter alone and our proprietary essential housing business originated financing projects with more than $2 billion of associated land and site development costs year-to-date. And finally, Twin Brook, our middle market direct lending platform has demonstrated its resilience, as a result of its sector-driven strategy focused on high-quality companies with strong covenant protections. Despite increased volatility, Twin Brook has no realized credit losses year-to-date and through the third quarter has deployed approximately $2 million of capital into more than 20 new companies and over 150 add-on investments to existing borrowers. I’ll close out my remarks by highlighting some important firm events.

A few weeks ago, we held our annual TPG Capital Investor Conference. We have 200 of our limited partners and attendants, together with nearly every professional on the TPG Capital team. We were able to highlight our strong momentum including the differentiated investments we’ve recently made in TPG Capital 9 and Healthcare Partners too that exemplify our distinct playbook and flywheel. Although this event is focused on TPG Capital, we have always had the leadership from all of our business units end. And this year we also included our Angela Gordon colleagues. We took the opportunity to showcase our talent, team and further connections between our LPs and the leaders across our firm. Coinciding with this, we also hosted our CEO conference for the first time since 2018, with over 100 TPG portfolio company CEOs and senior advisers participating.

Of all the events we hold, I find the CEO conference to be one of the most powerful examples of our ecosystem in action and we deliberately schedule it alongside our investor conference so that our LPs have an opportunity to engage with our CEOs directly. Now I’ll turn it over to Jack to review our financial results.

Jack Weingart: Thanks Jon. As a reminder, the results I’ll be discussing reflect TPG on a standalone basis. They do not include Angela Gordon, since the transaction closed subsequent to the end of the third quarter. TPG had a record quarter for fee-related revenues, with FRR of $321 million, up 12% sequentially and 14% year-over-year. This was a result of strong growth in both management fees and transaction fees. Management fees totaled $279 million and grew 9% from the second quarter due to improved fundraising combined with an increase in catch-up fees. Transaction fees increased 83% sequentially to $31 million and continue to be driven primarily by our lead role in structuring and placing the debt financing in connection with new investments across our platforms.

Our well-established debt capital markets business continues to be a strategic weapon providing us and our portfolio companies with differentiated access to capital which is particularly valuable in the current credit market environment. FRE was $156 million for the third quarter up 24% sequentially and 29% year-over-year. This significant growth was due to the FRR growth I just mentioned as well as continued strong expense management resulting in an FRE margin of 49% for the third quarter. This is more than a 560 basis point improvement from the year ago quarter. Our FRE margin for the last 12 months was 44%, which reflects the consistent progress we’ve been making towards the 45% FRE margin target we had set for the end of this year. While our FRE margin in the fourth quarter will blend down with the acquisition of Angelo Gordon, we believe this provides us with a meaningful margin expansion opportunity as we look to realize significant operating leverage from the combination and scaling of our businesses.

After-tax distributable earnings for the third quarter were $196 million or $0.56 per share of Class A common stock. This includes $43 million in net realized performance allocations which were primarily attributable to the successful CAA realization that Jon discussed. Additionally, similar to the previous two quarters we incurred non-core expenses related to the acquisition of Angelo Gordon of $9 million for the third quarter, which is included in our realized investment income and other line item. Turning to our non-GAAP balance sheet. We had $647 million of cash and cash equivalents and $450 million of long-term debt at the end of the third quarter. In late September, we upsized our revolver from $700 million to $1.2 billion and extended the maturity of both the revolver and our term loan.

As a result of the financial strength of our business we were able to maintain the attractive pricing on our facilities and further enhance our liquidity position to provide ourselves with ample financial flexibility. When we went public early last year we capitalized our balance sheet with excess cash in anticipation of a potential strategic acquisition. Last week, we closed the acquisition of AG and use this excess cash in addition to drawing down $470 million from our upsized revolver. Pro forma for the cash used at closing our non-GAAP cash and cash equivalents at September 30 would have been approximately $170 million. Our net accrued performance allocations at the end of the third quarter were $692 million compared to $760 million in the prior quarter.

This decrease was driven by the realized gains I mentioned earlier as well as a $24 million decline in the value of our investments. Our aggregate portfolio depreciated less than 1% in the third quarter and appreciated 6% over the last 12 months. This performance reflects continued top-line growth and stable margins across our companies offset by multiple contraction. Specifically our private equity portfolio grew revenues by 26% over the last 12 months and our companies generally continue to effectively navigate inflationary pressures by passing through higher input costs. Within real estate higher cap rates were largely offset by our careful sector selection and favorable secular growth trends across our sub-sectors. Such as light industrials, student housing, data centers, purpose-built single-family rentals and life sciences, which collectively make up approximately 65% of our unrealized value.

Across our portfolio, net operating income for the last 12 months grew 11% year-over-year. We finished the third quarter with $136 billion of assets under management, up 1% year-over-year. This was driven by $11 billion of capital raised and value creation of $3 billion, partially offset by $13 billion of realizations over the last 12 months. Fee-earning AUM was $79 million and AUM subject to fee earning growth totaled $11 billion at the end of Q3, of which $9 billion was not yet earning fees. Moving to fundraising. We raised $3.4 billion during the quarter and continue to make progress across our flagship fundraises. As Jon mentioned, we continue to expect each fund to be larger than its predecessor. For TPG Capital IX and Healthcare Partners II, we expect to hold final closes towards the end of this year.

For Asia VIII, we expect a final close in the first half of next year. And for Rise III, we held our final close for the fund over the weekend, bringing total fund size to $2.7 billion. This is a 24% increase from Rise II and demonstrates the strong support from both our new and existing LPs. As we complete these campaigns, we’re experiencing nice momentum as we launch our next flagship campaigns. First, we recently launched fundraising for our sixth growth fund and are in the process of holding a strong first close. Second, we are now approximately 65% invested and committed for our $7 billion Rise Climate Fund and we’re actively working towards launching the next vintage. Finally, as we launch those next-generation flagship funds, we’re making solid progress across the new business initiatives I’ve discussed previously.

For our inaugural real estate credit strategy, after quarter end we received commitments of more than $750 million. We have closed on approximately $650 million of this capital and we expect to close on the remainder as we raise additional capital for the TrackO [ph] fund. In our Climate business, in addition to launching the next flagship private equity fund, we’re continuing to make progress on the launch of our inaugural climate transition infrastructure fund. We’re seeing strong interest from anchor LPs and expect to be in the market in the first half of 2024. Overall, we remain very active across all of our strategies and we’re confident in our ability to continue delivering differentiated performance. Our growth engine is strong and with the addition of TPG Angelo Gordon and our combined capital formation capabilities, we believe we’re in an excellent position to drive consistent, meaningful and diversified growth across our business.

Now, I’ll turn the call over to Angela to take your questions.

See also 20 Best Chocolate Brands in the World and 10 High Risk High Reward Businesses in the US.

Q&A Session

Operator: [Operator Instructions] Our first question comes from Alex Blostein with Goldman Sachs. Please go ahead.

Alex Blostein: Hi, good morning everybody. Thank you for the question. I was hoping we could start with a quick discussion on Angela Gordon and I understand, we’re going to spend more time on it next week. So maybe this is a little bit of a preview. But as you look at some of the information you put out on the business, a couple of weeks ago, it looks like fundraising Angelo Gordon was fair to muted. I think it was only about $2 billion through the first half of 2023. So, help us maybe unpack, what were some of the sources of constraints in that business? Was that sort of deal related and uncertainty related? And how do you expect the fundraising to evolve from here, action of any sort of synergies with TPG? Thanks.

Jon Winkelried: Yes, Alex I can — it’s John. I can take a shot at that and Jack, could add in as well. But I think if you look at the fundraising momentum that Angela Gordon had prior to our transaction, they had substantial — that made substantial progress across a number of the parts of their business. And when we — I think it ultimately announced, our transaction, I think that as you would have expected, there was a bit of a pause that I think it was experienced really across the strategies from LPs, who naturally we wanted to understand exactly, what was happening in the transaction. On several fronts by the way, wanting to understand, how Angelo Gordon will be integrated into our firm, wanted to understand whether or not decision-making would be changing in any respect in terms of the investment process, wanting to understand whether or not there would be any changes in people, et cetera.

So I think that — not surprisingly, I think the number of the LPs took a bit of a step back and wanted to have an opportunity to understand the scope of what we were doing and also frankly to meet with us, and spend some time with both firms together to hear from us directly. So, we have spent a fair amount of time now going out together, even prior to the actual close of the transaction, meeting with LPs, and familiarizing them with TPG, how we were thinking of bringing the two firms together. A number of us spent some time at their annual LPAC meeting, which basically across all of their different strategies and had an opportunity to do a fireside chat in the front of the room. I did a fireside chat and firm in the room as well as individual one-off meetings for the question of the LPs. And this will be a continuing process.

But I think that the reaction and response that we’re getting from their LP base overall, I think now that we’ve had a chance to spend some time with them and we’ll continue to do that. I think it’s been very good. And I think that we’ve been clear about how Angelo Gordon, will be positioned inside of the broader organization. And it feels to me like we’re getting back to sort of more business as usual, as we sort of — unless we’ve now closed the transaction and we’ll continue the engagement with the LP base together. So — not surprising, I think in the context of a transaction that is somewhat transformational, for both organizations. And so I think we appreciate LP’s desire to learn more to understand it. But I think we’re very confident coming out of it that we’ll be able to accelerate capital formation together.

Jack Weingart: Yes. I would only add to that, Jon that in addition to the temporary pause from their existing LPs as they wrap their minds around this and make sure they’re comfortable with the with the combination of the stability the real longer-term opportunity here is expanding their LP base and introducing them to some of our larger LPs. And that’s something that we’ve already been actively working on that takes a while to play out, but we’re encouraged by the early engagement with some of our larger LPs to help expand their capital. So we would expect a reacceleration of their fundraising as we enter next year.

Alex Blostein: Great. That’s helpful. Thanks. And then my second question around TPG’s fundraising. It’s great to see you guys come through with the existing campaigns and getting closer to the end of that as you mentioned your — I think are on track to launch Climate 2 for next year. And just given the fact that we’ve seen a more challenging environment for broader private market fund raising over the course of the year. How different do you think this strategy will be received by LP given that it is a little bit more nuanced and it is syncratic to you guys? And their ability to sort of upsize the size the fund relative to the processor is an strategy?

Jack Weingart: Yes. On the climate — sorry look, I would take a step back on the fundraising mark overall and think about as we went public in early last year, we knew we had this kind of the big super cycle of our flagship funds coming for the next couple of years. As I talked about on the call, we’re approaching the end of that. I think the work we’ve been doing in the meantime has been positioning ourselves for the next wave of growth as we enter next year and the year after. And I’d say, we feel good about the progress we’ve made both in terms of new business creation like the Climate Infrastructure Fund that you’re referring to. And the Treco fund that we talked about, and the acquisition of Angelo Gordon. So now we’ve got a whole new growth curve ahead of us.

On your question in particular Alex, I would think about the Climate private equity fund the next generation of our $7 billion fund and the Climate Infrastructure Fund together. And we’ll obviously be updating you all as we make progress there. But I would say, the early engagement is very high. I think we’re — continue to be viewed to have a leading position in that market. And across those two funds I would expect substantial growth off of the size of the first private equity fund. And when you take all of what I talked about into account with Angelo Gordon’s funds the growth in credit the launch of climate we expect fundraising activity to increase next year over this year.