TPG: Upping its game

Private equity giant TPG Capital has placed real estate among its top three investment strategies. Kelvin Davis, who oversees the firm’s real estate activities, explains the mission in an abridged version of this month’s Blueprint interview in PERE magazine.

TPG decided to get into real estate with a dedicated team in 2009 when it took part in the auction of a $4.5 billion non-performing loan and real estate owned portfolio of the failed Corus Bank from the Federal Deposit Insurance Corporation (FDIC).

Since then, the Fort Worth-based firm co-founded by David Bonderman and Jim Coulter has been growing a dedicated real estate group which now has 15 professionals. The firm has put $1 billion of equity to work in US and European real estate situations during this past year alone.

In the company’s first interview on its real estate ambitions, Kelvin Davis, the de facto head of real estate and former head of North American buyouts at TPG, explains the mission to PERE in the July issue of the magazine (Click Here.)

Davis, who in 2000 left Colony Capital to join his former Bass Group colleagues, Bonderman and Coulter at TPG, says that when the real estate market began heaving in 2008, the opportunity to enter suddenly became much more interesting.

Davis concurs in some cases where other firms have launched into real estate it has perhaps been a little more “temporal” and without the “unequivocal support” of senior leadership of the firm.

“Here that is absolutely not the case. If you ask David (Bonderman) or Jim (Coulter) which are the top three strategic priorities for the firm – real estate would be one of them, I assure you,” he says.

In building the team to run the platform, TPG Real Estate began with “retired real estate guys,” Davis jokes, referring to himself. Bonderman and Coulter asked him to transition to real estate, and he co-opted Anand Tejani, “in-house talent” to initiate the business in Europe. The firm also turned to the outside in order to hasten its program and add more current capability than perhaps even Davis could offer immediately. The first person Davis hired after interviewing dozens of people was Avi Banyasz who joined in January 2011 in New York as partner in the RE team co-running it with San Francisco-based Davis.  

The firm also hired Robert Weaver as a partner, who joined in January 2012 from Morgan Stanley to focus on capital raising, and is also based in New York. In addition, it recruited Jamie Sholem from Goldman Sachs’ Real Estate Principal Investments Area (REPIA), Tripp Johnson from Fortress Investment Group, Sholem being in New York and Johnson in San Francisco. Tejani meanwhile co-opted Jeroen Regeur onto the real estate team after he worked on taking over distressed Dutch real estate company Uni-Invest. Krysto Nikolic joined also in London from AREA Property Partners. Meanwhile, Adam Metz joined as senior advisor in 2011 having served as chief executive of General Growth Properties (GGP).

Davis also explains that, since the deal to buy the Corus portfolio in 2009, TPG Real Estate has tried to invest “thematically.” For example, in 2010, it focused on the opportunities in the underlying US housing market.

One of the other themes that TPG finds interesting was the 200 basis point to 300 basis point spread between high-quality office properties in a city such as New York and secondary cities such as Atlanta or Phoenix. To capitalize, TPG has negotiated a private investment in a public equity transaction for 43 percent of small-cap REIT called Parkway Properties.

So far, TPG Real Estate’s deals have been funded by the parent firm’s primary private equity fund, TPG Partners VI, or one of its two separate accounts with Ivanhoé Cambridge, the real estate subsidiary of Caisse de dépôt et placement du Québec, and the New Jersey Division of Investment. However, the challenge that lies before TPG is how it can grow its real estate platform in terms of its capital base.

Davis insists its sources of capital remain “plentiful and highly engaged.” Nonetheless, a traditional commingled fund is understood to be on the horizon although, clearly, there are restrictions over what the firm can say about its fundraising activities.

“We are very fortunate to have the support of Ivanhoé Cambridge, New Jersey and, of course, the breadth of TPG investors on whose behalf we are investing today,” Davis says. “Over time, we will need to build more and more varied relationships for an increasingly active program. In the last year alone, we have invested about $1 billion in equity and we see a lot more interesting opportunities.”

“The challenge is to build momentum and not make any mistakes,” says Davis. “(Our) investments need to keep working, we need to make more of them and we need to keep upping our game.”