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TPG is reborn … again

LPs will be watching with interest as one of the industry’s heavyweights cements its new positioning.

Raising more than $10 billion is not to be sniffed at, even in this buoyant market.

Indeed only a handful of the world’s leading private equity firms can boast this feat in the last 12 months.

Yet some noses may have wrinkled slightly when TPG closed its seventh flagship fund this week on $10.5 billion. A period of 21 months spent on the road at a time when certain competitors (eg, Warburg Pincus, Advent International) have apparently been raising money for fun, speaks of a marketing process that must have been far from straightforward.

It is no secret that TPG has hit significant potholes in recent years. Most notably, as with other mega-firms, it has seen some GFC-era deals go spectacularly awry. Two that spring to mind would be TXU (now renamed Energy Future Holdings), which collapsed into bankruptcy almost erasing the firm’s investment, and WaMu, the biggest US bank failure when it collapsed in September 2008.

And like other firms of its stature and era, TPG has been under pressure to demonstrate a clear succession plan. With the appointment of Todd Sisitsky as the firm’s managing partner last year, this issue seems to have been put to rest.

In terms of investment performance, Sisitsky tells PEI that post-financial crisis the firm has been successfully focusing on value creation in the portfolio. “We had a tremendous amount of portfolio appreciation over the last three to four years,” he said following the fund close on Monday. “Driving growth: that’s what we’ve been good at; that’s what we’ve been doing for the last six or seven years.”

According to data from online private equity marketplace Palico, Fund VI had an IRR of 11.2 percent and was generating a return of 1.5x, as of December, against a benchmark average of 10.8 percent IRR and a multiple of 1.5x for funds of a similar vintage. Back in December 2012 the same fund was returning an IRR of just 7 percent and was at a cash multiple of 1.1x.

And what of the fund size? It seems like a comedown to raise a fund a little over half the size of its predecessor. (But then any fund will look small compared with the $19 billion TPG VI, the largest ever raised.)

The fund size, says the firm, at $10.5 billion, was matched to the market opportunity. The firm has refined its approach to rule out mega-deals in the $10 billion-plus category – such as TXU acquired for $48 billion by a group including TPG – and focus on deals in its core sectors in which it can “bend the curve on performance”, according to a source with knowledge of the firm’s strategy.

And anyone who might sniff at a smaller fund also needs to take into account the capital raised across the TPG platform, totalling “over $45 billion and generating strong momentum in the wake of the financial crisis”, said Jim Coulter, co-founder and co-CEO.

TPG has never been afraid to adapt to changing market conditions. Once upon a time it was characterised as a turnaround specialist, then a large buyout shop. LPs will be watching with interest as it seeks to cement its credentials as a global growth player.