Q4 2022 TPG Inc Earnings Call
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Good morning, and welcome to TPG is fourth quarter and full year 2022 earnings conference call.
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Go to T. P jeez I our 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.
Great. Thanks Tobey.
Welcome everyone. Joining me. This morning are John Michael Reed, Chief Executive Officer, and Jack Wang Our Chief Financial Officer.
In addition, our executive Chairman and co founder Jim Culture, and our President Todd Sosinski are also here and will be available for the Q&A portion of this morning's call.
Before we begin 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.
<unk> undertakes no obligation to revise or update any forward looking statements, except as required by law.
Within our discussed in earnings release, we're presenting GAAP measures non-GAAP measures and pro forma GAAP and non-GAAP measures, reflecting the reorganization that was completed during 2021 and immediately prior to Tpg's IPO.
We believe it's helpful for investors and analysts to understand the historic results through our go forward structure and please refer to <unk> earnings release for details on the pro forma financial information.
We'll also 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 fourth quarter, we reported GAAP net income attributable to the TPG, Inc of $24 million and after tax distributable earnings of $227 million or <unk> 59 per share of class a common stock.
We also declared a dividend of <unk> 50 per share of class a common stock.
We paid on March 10 to holders of record as of February 27.
With that I'd like to turn the call over to John .
Thanks, Gary.
This morning, we are looking forward to discussing our results now that we've completed our first year as a public our first full year as a public company.
Since our IPO early last year, we've navigated markets with more disruption and volatility than we've seen in over a decade.
There has been pressure from persistent inflation.
Rising rates and geopolitical conflicts.
This macro environment has led to challenges in our industry marked by tougher fund raising.
Slower deal environment tied.
Tighter financing conditions and declining valuations.
Against this backdrop TPG has demonstrated resilience and growth.
We not only delivered a surpassed what we set out to accomplish in our first year as a public company and we finished 2022 with another strong quarter.
We deliberately chose to go public as we were launching several flagship fund raises so tpg's public shareholders could share on our accelerated growth.
Despite difficult industry wide fundraising dynamics, we raised $30 billion of capital in 2022.
A 47% increase over the prior year.
Global private equity fund raising declined 19% in 2022.
But we believe we gained share.
As Lps continue to consolidate their GP relationships among their best performing managers, including TPG.
We held early first closes across all our flagship funds in the market, including TPG capital Health care Partners capital Asia and rise.
Although this is one of the most challenging fundraising environments. We've seen we are very pleased with the quality of engagement and continued support from both our long standing and New limited partners.
However, as we look ahead, we are not immune to the fund raising challenges our industry is facing which will continue to drive uncertainty as campaigns are completed among alternative asset managers.
As a result of our fundraising momentum in 2022, we finished the year with $43 billion of dry powder.
Which is up 51% from the prior year and represents 55% of our fee, earning AUM.
Total AUM was $135 billion at year end <unk>.
A 19% year over year increase year over year, driven by strong fund raising and value creation of 8% across our platforms par.
Partially offset by $16 billion of realizations as we selectively monetize investments at attractive valuations.
Looking to our financial results we.
We delivered strong performance in 2022.
Fee related revenues for the full year were $1 1 billion and grew 24% from the pro forma prior year.
Full year FRE of $450 million grew 39% from pro forma 2021 and represents a 42% FRE margin.
We believe our strong results through such a volatile year demonstrate the durability of our franchise.
During our IPO, we highlighted the importance of organic growth and innovation as a cornerstone of Tpg's long term success.
Over the past year, we have expanded into new strategies, where we believe we have differentiated angles and compelling growth opportunities.
Within our market solutions platform, we launched and completed first closes for two GP led secondaries funds.
TPG GP solutions and TPG New quest.
As I alluded to on our last earnings call in December we closed a $500 million anchor commitment to the inaugural TPG next fund from Calpers, one of the world's leading institutional investors.
As a reminder, TPG next was created to seed and state. The next generation of diverse led firms and alternative asset management.
We believe there is a significant market opportunity and are committed to backing and supporting underrepresented managers in our industry.
As a result of fund raising and new products, we have continued to grow and diversify our LP base.
In 2022, we added approximately 60, new institutional relationships.
And more than 55 existing Lps have broadened their commitments to TPG by investing in new fund strategies with us.
In aggregate these new and expanded relationships committed more than $6 billion of capital to TPG in 2022.
In addition, we have made meaningful progress in strategically expanding our presence in the high net worth channel, placing five different funds across the different channel partners.
Looking ahead to the rest of 2023 and beyond the market share at a crossroads.
Fed action has pushed yields higher and equity multiples lower driving investors to exercise caution as they see equilibrium and valuations.
Despite some recent recovery in the equity and leveraged finance markets investment pace among alternative asset managers, including TPG has remained muted.
Buyers and sellers seem to be taking another pause as they wait to see how a number of macro drivers play out such as interest rates inflation any possible recession.
With significant dry powder long dated capital and a deep sector focus we believe TPG is well positioned to capitalize on this market dislocation.
While we expect near term deployments remain relatively light we are building a pipeline of interesting opportunities through our long term theme driven sourcing approach.
Despite the general slowdown in deal activity for the industry over the last few quarters.
We still saw pockets of opportunity for deployment and realizations across our diverse set of platforms and fund strategies.
We deployed $5 7 billion and $16 6 billion in the fourth quarter and full year 2022, respectively.
I'll walk through a few highlights.
In the fourth quarter, we completed five health care deals across our capital platform reinforcing the strength of our differentiated franchise.
This includes the acquisitions of Doc Gen, reaching in Europe , and I, Nova Pharmaceuticals in Asia Pacific.
The take private of Coke actress the carve out of claims extend any follow on investments in monogram health.
And our growth fund, we completed the carve out of <unk> associates, a leading owner operator and manager of diagnostic imaging facilities in partnership with Nevada Health, a preeminent not for profit health system.
This deal is a great example of Tpg's long history of building unique partnerships with high quality companies nonprofits and academic institutions to create proprietary transactions.
Given the capital constraints in today's market, we are seeing a growing interest in creative partnership opportunities and our pipeline is continuing to build.
The market dislocation has also been particularly interesting for our Tech Adjacencies fund, which.
Which we established to provide flexible capital solutions for leading companies in the technology industry.
We believe the recent tech slowdown has created the most attractive investing environment for key Ted since its launch in 2018.
<unk> recently closed two structured investments.
One of the leading vertical SaaS in integrated payments company.
A second and a leading provider of cyber security solutions.
The current challenging backdrop for growth stage technology companies has made the strategic value of <unk> differentiated capital mandate, even more relevant.
Ah Rice platform is at the forefront of the impact space and our inaugural rise climate Fund remains ahead on its pace of deployment.
The increasing focus on energy security and D globalization.
Along with the inflation reduction act in the U S and the new net zero industry Act in Europe .
Fundamentally enhance the investment opportunity.
We are seeing an increased demand for capital to address address energy transition in climate needs around the world.
As an example in December TPG rise climate committed to invest in and Paul one of the largest and fastest growing residential de carbonization platforms in Europe .
To give you a sense of its momentum and Paul has grown its customer base and revenues.
On average threefold each year since its founding in 2017 and is profitable.
And finally in our secondaries platform or a normal TPG GP solutions fund complete.
<unk> completed its second investment during the quarter and in Asia TPG, New Quest co led the creation of unique continuation vehicle for a leading Singapore based alternative asset manager.
We believe our secondaries business is well positioned for growth.
GP led capital is increasingly valuable source of liquidity and validation given the slowdown in exits, particularly for high quality sponsors how high quality assets and sponsors portfolios.
Our real estate on realizations, we've been intentionally patient and remain focused on driving growth within our portfolios, where we are relatively early in our average hold period following our significant monetization activity over the last few years.
We realized $4 2 billion and $15 5 billion in the fourth quarter and full year 2022, respectively.
This includes completing our previously announced sale of wind River to active in December with Jack will talk more about.
Several monetization of our public equity positions in regions outside of the U S.
Looking at our capital Asia and growth funds, we successfully IPO and partially monetize four of our Indian portfolio companies in a 12 month period.
Landmark cars, five star business Finance campus Activewear and NYCHA.
In November we fully monetized, our steak and <unk> at attractive prices generating favorable favorable returns despite the volatile equity market backdrop.
These ipos and realizations underscore tpg's, leading franchise in India, and the broader APAC region as well as our equity capital markets execution capabilities.
Just last week next tracker, which is in our rise portfolio completed at $734 million IPO, the largest and one of the first U S. Ipos this year.
Next tracker is a leading provider of solar tracking solutions and highlights the benefit of our theme based investing.
The IPO execution offering was highly successful with the order book, well oversubscribed and the stock trading up 27% on its first day.
In real estate during the quarter, we sold a portfolio of student housing properties and last month, we made a sizeable realization in one of our U S life Sciences and innovation focused platforms.
A sector that continues to experience strong tailwind.
Given our purposeful portfolio construction within durable sectors and themes, we've been able to selectively monetize investments despite a material slowdown in many parts of the real estate market.
Looking forward into 2023, we remain focused on the same growth and diversification objectives, we discussed with you previously.
Our priorities continue to be.
One completing our flagship and other fundraising campaigns.
To continue our strong track record of organic growth.
Always been innovators and we intend to expand into adjacent strategies, where we believe we have unique competitive advantages such as building climate infrastructure and real estate credit.
And continuing to scale, our GP led secondaries effort.
Three inorganic growth remains an important priority for TPG.
We're already tracking scale today, but we see significant white space in areas that are natural extensions for us to drive growth and diversification.
For example, we remain actively focused on expanding into corporate credits and continue to evaluate a range of opportunities in this space.
Before I conclude my remarks, I want to mention our global partner meeting, which we hosted earlier this week in San Francisco.
We covered a range of important topics, including investment strategy fund raising culture and growth drivers for the FERC.
Our partners are laser focused on continuing to deliver excellent performance for our investors, while also building and growing a market leading innovative franchise.
Now I'll turn the call over to Jack will take you through our financial results.
Thanks, John Good morning, everyone and thank you for joining the call.
Our fourth quarter results once again reflect the resiliency of our FRE centric business model.
We finished 2022 with total assets under management of 135 billion up 19% from the prior year.
The key drivers of this increase includes $30 billion of new capital raised and almost $7 billion of value creation across our portfolios, partially offset by $16 billion of realizations.
Beginning AUM increased over the year from 60 billion to 78 billion at the end of 2022 up 30% at.
At the end of the year, we had 13 billion of AUM subject to fee, earning growth of which 78% was not yet earning fees.
We continue to reach record levels and our financial performance total fee related revenue was $307 million for the fourth quarter.
29% year over year.
Fourth quarter management fees were essentially flat compared to the third quarter due to a one time step down in fee, earning AUM. Following the activation of the newest vintage funds for capital in healthcare partners.
Similarly, the recent step down of our capital Asia Fund will impact our fee related revenues in the first quarter of this year.
Transaction fees were particularly strong in the fourth quarter due to our capital markets business, which continues to be an important differentiator for our investment business.
During the quarter, our in house debt capital markets team.
Lead arranger role in raising a total of $5 billion of total debt financing in connection with several of the recent investments that John discussed.
For the full year 2022, we reported fee related revenues of $1 1 billion.
A 24% increase from pro forma 2021.
FRE grew 39% from pro forma 2000 $21 million to $454 million for full year 2022.
Driven by a combination of strong management fee growth of 29% and disciplined cost control, which resulted in an FRE margin for the year of 42%.
Our margin expansion of more than 400 basis points from pro forma 2021.
It demonstrates the scalability of our platform and the ongoing benefits of operating leverage.
For the fourth quarter, we reported FRE of $139 billion.
Up 53% from the pro forma year ago quarter.
In an FRE margin of 45%.
We believe this margin was somewhat elevated in the fourth quarter and our full year 2020 to FRE margin of 42% better reflects our progress towards our near term target of 45%.
After tax distributable earnings for the fourth quarter of 2022 were $227 million.
65%.
Increase year over year.
This includes $95 million contribution from net realized performance allocations in the quarter.
Primarily attributable to the closing of the wind River transaction.
This was an outstanding investment generating substantial profits for the firm and our fund investors.
Through Tpg's ownership and operational expertise, we helped to accelerate when rivers revenue and EBITDA growth, which was flat at the time of our acquisition in 2018 to double digit levels at the time of our exit.
We're very pleased with the outcome of this deal, which furthers TPG successful history of corporate carve outs and.
And highlights our thematic focus on digital transform transformation enablers.
Following the closing of the wind River sale, our accrued performance allocation balance decreased from $725 million at the end of the third quarter to 643 million at year end as $95 million in realized gains were partially offset by $12 million of value creation.
On the topic of value creation against a difficult operating environment, we continue to see the benefits of our thematic portfolio construction.
We invest in companies that have strong secular growth characteristics in sectors, where we have deep expertise that our portfolio delivered value creation of 1% in the quarter and 8% in 2022.
In our private equity businesses within each platform average portfolio of company revenue growth ranged from 25% to 40%.
In 2022 compared to 2021.
<unk> performance continues to be robust with particular strength in health care climate and high end consumer sectors.
In connection with our fourth quarter results as Gary mentioned, we announced a quarterly cash dividend of <unk> 50 per share of class a common stock represent 80, representing 85% of Tpg's after tax distributable earnings.
This is the highest quarterly dividend we've declared since our IPO in our first full year as a public company. We will have distributed dividends totaling $1 59 per share of class a common stock.
I would note that in connection with our annual compensation process in January we granted $3 7 million restricted stock units to our employees. These units will vest over three years.
And I would refer you to slide 28 of our earnings presentation for a comprehensive summary of our equity based compensation.
Looking at our non-GAAP balance sheet for TEP for the TV operating group as of December 31, we remain well capitalized with $692 million of cash and $450 million of long term debt.
Our $700 million revolver was also undrawn at year end, giving us ample flexibility to pursue strategic growth initiatives.
Now turning to fund raising we raised $3 6 billion of capital in the fourth quarter.
Primarily focused on new strategies, such as TPG next in certain areas of our growth platform, notably TPG to digital media and T. Ted This brought total capital raised to $30 billion in 2022, a 47% increase compared to the prior year. This was a major accomplishment.
Given the fundraising backdrop Andrew.
<unk> TPG, increasing market share due to the breadth and depth of our relationships the strength of our brand.
And most importantly, our strong investment performance across our platforms.
As we look forward to 2023, our fundraising objectives are as follows number one successfully complete the campaigns for our flagship capital Health care partners Asia and raise funds, which.
Which we expect to extend through the remainder of this year given the ongoing challenges in the fundraising market.
Number to make further progress on capitalizing our new businesses, including our secondaries platform TPG next and life Sciences.
Number three begin fund raising for our next flagship growth fund.
Which we expect to launch in the middle of this year based on current deployment pace.
And four continue our organic growth through the launch of new products spin.
Specifically, we are in discussions with potential Lps for inaugural funds for our private real estate credit effort checkout and for rise climate infrastructure.
The closeout, we're proud of the results that <unk> achieved his first year as a public company.
Tpg's FRE growth engine proved to be resilient in 2022, despite challenging market conditions.
We're confident in our firm's ability to navigate through dislocation, while continuing to grow our fee generating assets. We look forward to continuing to provide differentiated long term value to our public shareholders Limited partners.
Portfolio of companies.
I'll now turn the call back over to Shelby. So we can take your questions.
At this time, if you wish to ask a question. Please press star one on your telephone keypad, you may remove yourself from the queue by pressing star two.
Please limit yourself to one question.
We'll take our first question from Glenn Schorr with Evercore.
Hi, Thank you Glenn.
I don't know, maybe if you could put some numbers around the points that you just brought up be caught my attention on two things one was.
The step down in one first quarter for capital Health care in Asia.
Maybe put some numbers around that and the other part was the four buckets of fund raising great to hear.
I know, it's hard given the backdrop, but maybe could put a range around what we could be expecting on on the <unk>.
Fundraising side, thanks, so much.
Glen Thanks for the questions in terms of the step down on TPG.
Just to remind people.
In Q4, because we activated TPG nine health care partners too in Q3.
The fees charged on TPG eight healthcare partner, sorry, TVA Telco partners, one step down in Q4 that step down was about about $2 billion in TPG eight.
And it was about.
Two minutes.
$500 million in health care partners.
And then on your other question on I think on the General fund raising outlook.
Look obviously as I mentioned, we feel very good about the about the <unk>.
Yes, we made in 2022, we'd feel like we gained market share raising $30 billion in the in the complicated backdrop.
And also capitalizing new businesses as I mentioned.
I also talked about on the last call. The fact that we expected fundraising conditions to remain challenging throughout 2023.
And we continue to believe that'll be the case.
At the same liquidity.
Factors are impacting certain segments of the LP base, but not all segments, primarily the more mature parts of the market. While other parts of the market are growing nicely. The fund fundraising market remains quite crowded with GPS against this backdrop, we do expect to continue to gain share.
This year.
It is it has been helpful that as we entered 2023.
L P. As can now access the 2023 budgets.
And across all of the flagship funds, we have in the market TPG capital nine health care partners to Asia, eight and in Rice III.
We have very strong engagement with Lps.
Given the time it takes for Lp's two to complete their diligence most of that capital is lining up for Q2 and Q3.
So I would expect Q1 to be relatively light.
With an acceleration in Q2 and Q3.
It's too early to tell if we'll hit all of our targets, but we feel very good about the progress we're making across all of those all of those funds.
Helpful. Thank you.
Excellent. Thanks.
And we will take our next question from Ken Worthington with J P. Morgan.
Hi, good morning.
When you look at the information and data that Youre getting from your portfolio companies and maybe a little bit on the broader macro environment as well how is this informing your view on the outlook for harvesting as we look to 2023, I guess first have signals changed at all.
So far in 'twenty three from what you may have seen a quarter or two ago.
And if so.
Could this end up being a more constructive environment for harvesting gains than what you might have been thinking about.
Three six months ago.
Sure.
Thanks for the question.
I think in a nutshell across the board and particularly in the areas that we've been focused on which are areas that are generally experiencing secular growth. We've seen steady and strong results did thank Jack took you through some of the numbers and there really hasn't been a particular change or inflection.
This quarter, but we felt good about the company's performance both on the revenue side and on the EBITDA side.
On on the realization front.
We continue to have a number of areas that we're exploring sales.
We did sell need gene to Astrazeneca in January so there is still activity I'd say as a general matter.
The skew of the of the neighborhoods that we're investing in the companies that we're backing.
And the growth orientation in our investment strategy does lend itself to two strategic take out is probably a little bit more than the industry averages.
And that market will remain active even in different in different environments, having said that our realization pace was has been quite strong.
Years, we've seen the overall industry slow down a bit on the realization front.
So they'll continue to be opportunities for liquidity, we continue to seek I'm, probably not the pace of the last two years, Ken the only thing I would add to that is that.
We are seeing some.
<unk> and the kind of macro and an underlying kind of financial markets as it relates to deal activity that may help from the perspective of realizations. So for instance financing.
There's been a reasonably.
There's been a reasonable recovery.
Not full recovery by any means but there's been a reasonable recovery when you look at where credit spreads are looking like.
And the loan markets feel a little bit better to us in terms of sourcing financing.
And then also I think you've heard us go through.
Some of our activity on the with respect to public markets on the IPO side.
Leading up to our most recent which was next tracker and definitely feels like there is some pent up demand from the public markets as well because it's been void of IPO supply for quite a long time so.
There are the portfolio is performing well.
I think we are.
I think there's a broad range of sort of when things are ready to be monetized.
Reinforced that in the past that we're going to monetize when we feel like it's an optimal time to monetize but there are some there are some relative to last year, maybe some a few green shoots here or there in terms of the market backdrop. So.
We will see.
That was excellent. Thank you very much.
Thanks, Ken.
We will take our next question from Brian Bedell with Deutsche Bank.
Great. Thanks, good morning folks.
Maybe maybe switching over to deployment and in the context of fundraising as well too.
First on deployment, okay. It sounds like the better improved market environment is slowing some of the the expected or.
Raising some of the expectations of sellers and therefore slowing the process maybe just.
And your thoughts on if we do get a soft landing is that going to hang up deployment generally.
And then maybe through the different platforms.
I know I know rise climate of course is still ahead of schedule and.
And deployment, maybe it's just some commentary on whether you think that can continue to be the case with it especially with the new net zero industry Act in Europe is that even.
More potential than you thought even a quarter ago for that fund.
Alright.
Thanks for the question I mean.
We talked about this last year as you might imagine.
It's an interesting environment right now because the.
Some of the signals in the market like.
Some moderating in inflation, although the CPI print this week, obviously raises questions on that but some moderating inflation.
Rates, maybe inching back down a little bit what I was saying before in terms of credit spreads I mean, we we saw it.
If you go back to 22, right, we saw a some dislocation in the market.
As inflation spiked in there was the overall geopolitical kind of backdrop.
<unk>.
There's this dynamic of <unk>.
Buyers and sellers kind of not being in the same place people trying to get their heads around valuations slowed the market considerably.
The fourth quarter, the part of the end of the third and fourth quarter. There was definitely a kind of a pick up and you heard from from already from the the the.
Deal activity, we talked about that there was a more active environment.
The environment for deployment as we got towards the end of the year. It feels like because of these other signals now it feels like people are maybe there.
Like a little there's another little pause in the market.
Because I think people's expectations on price or maybe going back up I don't know, whether or not thats, well founded or not but it is I think youre going back up.
So I think it's going to be sort of a dynamic environment in front of us in terms of deal activity. It's also.
It's also creating some interesting opportunities.
For instance, when you look at.
GP solutions capital continuation vehicles things like that it's sort of it's Dino.
As sponsors try to think about how they want to monetize or partially monetize so we've seen an uptick there we've seen some interest in things like co control deals where we've looked at a couple because people are looking to take some money out. So I think that's sort of the general backdrop, Jim maybe you can talk about what's going on in climate.
Obviously momentum on climate was good going into last year, and I would have to say that last year was a seismic change to the positive obviously the.
Political activities in IRA Bill in the U S changed the landscape and accelerated the landscape dramatically, but the events in the Ukraine and the resulting.
Questions of energy security around the World also substantially increased activity.
In the comments you heard about our investment in NPL growing 300% of year, if you can imagine.
A German consumer rooftop solar in this environment would be a much more interesting energy security question for them given the changes and we're seeing that type of thing happening across markets.
So activity levels have picked up there will be a time for them to feathering because for example in the IRA It's out there people know, it's coming but it hasn't been fully enacted yet.
We're expecting that to happen over the next few months.
But <unk>.
Generally the backdrop and the interest.
In climate investing has substantially to a positive.
Scott the only thing I was going to add is that if you look more broadly across the portfolio.
The franchise.
We have other areas such as T Tad, which I think is really about solution based capital. That's actually this is a great environment.
That platform has been very busy we continues to be quite busy.
And then John mentioned in his comments the Midwest associates carve out from a from a not for profit.
And that's I think indicative of another thing that we're seeing in our pipeline quite a bit which is sort of unusual relationships structured partnerships are.
Our history of being a.
Partner to everyone from Pfizer to Humana Intel AT&T.
University of Pittsburgh Medical Center, I think that serves us very well when it comes to sort of more problem solving capital.
And and we spend a lot of time developing those relationships it takes a little bit longer for the opportunities to play out but that that portion of our pipeline in our core private equity business remains robust.
Okay.
Great color. Thank you so much.
Thanks, Brian .
We'll take our next question from Gerry O'hara with Jefferies.
Great. Thanks for taking the question this morning.
Maybe just kind of touching on FRE margin.
For a moment I think during the prepared remarks mentioned.
Jack you mentioned the somewhat elevated in the quarter, but also recognizing that youre kind of tracking.
Ahead of ahead of prior I guess guidance towards that sort of 45%.
Target so.
Maybe a couple of <unk>.
It takes that were in the fourth quarter, and then sort of how you might see the trajectory playing out as we look forward into 2023.
Sure, Yes, what I meant by the elevated FRE margin in Q4 was largely related to the.
Strong performance on the capital markets fees that I also mentioned on the call, which obviously have a high flow through margin associated with them. So if you normalize that for a more typical quarter you bring it back down to as I mentioned something closer to a full year FRE margin in the low <unk>.
Which is what I would call our kind of our launching pad for continued performance toward and we stick with the same target we've been talking about getting to 45% on a sustainable basis by the end of the year this year.
Okay. Thank you.
We'll take our next question from Michael Cyprus with Morgan Stanley .
Hey, good morning, Thanks for taking the question Michael maybe just on credit you guys have expressed interest to jump back in it sounds like Youre continuing to.
Think about that and do some work. So just hoping maybe you can update us on your latest thoughts there it.
It sounds like you are continuing to evaluate ways to enter maybe you could just update us on what youre seeing how the environment is impacting those conversations and what learnings and insights have you gleaned from the work that you've done so far and how that may inform your approach and timing.
Thanks for the question Michael.
<unk>.
I don't know if we have an hour on this call.
It's a big questions Big topic look I think we're continuing to be focused on it particularly in this environment, where we see.
Valuations moving around a lot.
See when you look at sort of where.
The return opportunities are in a market like this particularly with dislocation of capital availability.
Some really interesting capital structure types of opportunities whether that top of the capital structure middle of the capital structure. So we continue to believe that when you think about credit do you think about sort of the total return part of the spectrum. There that is very synergistic with our business.
You can hear us talk about our business and I'm sure you can glean that we're very.
Sector and company focused investors.
Where are we where we focus we are deep we have a lot of industry knowledge a lot of company knowledge that dovetails very well with that part of the business. So I think we continue to have a strong interest in that.
Where we are.
We have not backed.
Backed off what we've said earlier, which is we have an objective of re entering that space.
And.
We expect to.
At some point.
Fuel, making as you know as far as inorganic entry Dealmaking is always complicated, particularly in these types of business. So.
We're patient we're working on finding exactly the right partners and the right opportunity.
Theres other parts of the credit landscape.
That also are really really interesting and I think you've heard us talk about one if you look at what's going on real estate. There has been a pretty massive dislocation in the financing markets and real estate.
<unk>.
In some respect real estate valuations versus financing costs are upside down relative to where they've historically been.
And so we're out in the market right now.
I think we had announced on another earnings call we hired.
A.
Our new head of our real estate credit business does inquired, who came to us from Goldman Sachs, where he was for many years, we're out in the market right now raising a opportunistic real estate pool of capital and we feel like we feel we feel pretty good about it there's a lot of receptivity around the market from our Lps that were talking to and particularly given the strength of our real estate franchise, we're sort of.
We're drafting off of that a lot of respects for this capital raise and we feel pretty good about it. So we're expecting that we'll get some money raised there.
We think that the opportunity on that side of the coin is probably as good as we've seen it in maybe maybe a couple of decades. So.
We're focused on it.
Working on it and we.
We'll keep you up we'll keep you up to date.
Great. Thank you.
Thanks.
We'll take our next question from Michael Brown with K B W.
Hi, Good morning, Thank you for taking my questions.
I wanted to.
Maybe get a little bit more color about the management fees.
Additional made on the bonding could add for the trajectory here. So I guess on the fourth quarter you will some.
The step down in fees.
Has a modest impact in the first quarter as well, but you did talk about that this 13 billion of AUM subject to.
The earnings growth here.
So any additional color you can add about how to think about the pace of that potential 70 million of management fees could layer in over the over the coming quarters.
Any other thoughts here on the fee rate going forward.
Yeah, Let me I appreciate the question, we've gotten a couple of questions.
Since posted in our results. This morning about the average fee rate.
Let me try to try to clarify that because theres a lot of pieces moving around its always the calculating an average fee rate based on average AUM for a quarter is.
Is it very imprecise thing to do particularly in a period like this we're activating new funds and seeing step downs in other funds because we don't charge on a.
Daily average basis I can tell you first of all we're not seeing any fee pressure in our in our.
Business, we're not changing our fee schedules were not adding discounts that we didn't have before.
That's the most important point on the on the.
Average fee rate calculation, there are a couple of particularly a couple of things flowing through that as you look at Q3 and Q4 in particular.
For example in Q3 as you know we activated TPG nine healthcare partners. Two in July So we were actually earning fees for virtually the entire quarter in Q3 on that call it $10 billion.
If you run your.
The way most people calculate weighted average AUM for the quarter would be zero or plus 10 divided by two you would assume we're earning fees on 5 billion, we were actually only about $10 billion in.
In Q4, we saw the opposite right because the step downs that I just talked about.
<unk> our fees for the full quarter. If you calculated average AUM for the quarter you would have picked up a higher number at the beginning of lower number of the end, but we actually had the step down that affected the fees for the whole quarter. So that's that's some of the nuances that you see it flowing through.
On the Shadow AUM that you asked about we did add nicely to that during the quarter. If you look at where we raised capital during the quarter.
The three biggest areas were digital.
Digital media fund, which charges fees on invested capital only that was 800 million $350 million for <unk>, which is also fees on drawn capital only and 500 million for TPG next which is a normal fees on committed structure, but we have not yet activated that funds. So all of that would have gone into.
AUM, but not AUM and it will flow in overtime predicting.
When that shadow AUM will pay fees and over what time period is really impossible depends upon the pace at which we invest that capital.
Okay, great. Thank you for that very thorough explanation there.
Sure.
And we'll take our next question from Alex <unk> with Goldman Sachs.
Okay.
Hey, good morning, guys. Thank you for taking the question.
Hey, I was hoping we could unpack some of the fundraising trends you saw over the course of the fourth quarter and really how are you thinking about 2023. So I guess first point is in terms of the ultimate sizes of some of the flagship campaigns that you guys are on today.
Any change in kind of how you think they will shake out in terms of the absolute size of understanding the timing might take a little bit longer and then when looking at the fourth quarter, specifically I guess not a big surprise that capital segment didn't see a lot, but I was surprised by is still pretty robust pace of fundraising and growth. So maybe just spend a minute on kind of LP appetite.
For the more kind of traditional PE fundraising versus the girl franchise.
Sure, let me try to address several of those points Alex.
The first of all the appetite continues to be on your last point continues to be quite strong.
You guys can look at our performance and make your own assessment, we think we're performing quite strongly in.
In generating returns and importantly, delivering liquidity to our Lps are DPI is quite high relative to our peers at a time when others are not distributing as much capital as we have over the past year or two so the result of all that is strong appetite across the flagships, we have in the market.
I think I mentioned on our last call. We did expect Q4 to be quite light.
Just given how tapped out lp's where as.
As we entered Q4.
And we actually were able to raise as you saw over $3 5 billion of capital across other businesses, most notably the ones I just mentioned <unk> digital media. There was also some co investment in there on growth and <unk>.
Capital as we close those deals and brought in our Lps as co investors that co investment capital largely does not pay fees, but it is highly strategic to us as our LP is expect us to to deliver that co investment. So that's how I'd characterize kind of Q4.
And as we look out to this year as I mentioned, a few minutes ago.
We do continue to see strong demand.
<unk>.
<unk> always has kind of natura.
Natural arc to it and oftentimes after.
A large first close like we've had in all of these funds.
You tend to see a bit of a back loading to the remainder of the campaign and I think thats.
Always true, it's even more true in today's kind of fundraising environment.
As I mentioned, we have a lot of people doing work and doing their diligence I would expect Q1 to be relatively light, but a good acceleration into Q2 and Q3, we haven't changed our targets on any of the funds, but it's too early to tell whether we'll hit all those targets or not.
Got it I appreciate that thanks.
Okay.
We will take our next question from Brian Mckenna with JMP Securities.
Great. Thanks, So I appreciate the detail on the number of Lps added during the year, but can you remind us how many LP relationships do you have an aggregate across your business and then what's the breakdown between the U S and the rest of the World and then kind of over time, where do you see the most opportunity to add new Lps.
I think the Lps I can look at more precise number for you it'd be L. P as across all of our businesses.
And the kind of call it call it 500 to 600 category.
Yeah.
Although I think that that may not be a bigger in there, but let me come back to you on that.
And what was the second what was the second part of your question yes.
Yes, just in terms of where do you see the most opportunity.
Incremental <unk> from here.
Yes, we have.
We have been that number has been growing over time as John mentioned in his prepared remarks.
We still have a lot of untapped.
Potential in the LP base as we continue to grow.
New products that are more appealing to different segments of the LP market and as we continue to build out our distribution platform, both the institutional side and the high net worth side.
I think the biggest source of potential.
We're fairly underway in Europe .
We have a lot of room to grow in insurance.
We have a lot of room to grow in the high net worth channel, which will sell as we've talked about many times will accelerate as we build out more broadly applicable products to that channel.
And those are probably the biggest areas I'd call out, but we see a lot of potential to continue to expand our LP base.
I would just add I was.
Several trips to Europe last year for fundraising and most recently the fourth quarter and we have a number of really strong dialogues. The majority of the 25 meetings, we had with new folks.
That we're getting now but it feels like there's a lot of untapped potential that we're just starting to make some progress on.
Great. Thank you.
We'll take our next question from Adam Beatty with UBS.
Alright, Thank you and good morning wanted to ask about the capital market solutions business or businesses Theres a couple of different elements in there you already mentioned.
Some of the Secondaries fund raising which is good also the strength in debt arranging in Q4, but just wondering about ECM in the public markets business and then just overall what kind of growth trajectory, you're thinking about maybe near term long term are you still adding resources there.
And obviously any guard rails, you could put around transaction fee expectations would be great. Thank you very much.
Yeah, Hey, thanks for the question.
It just address kind of go in reverse order, we definitely are continuing to add resources in that area. We view the capital markets business to be and I'll take one piece at a time to be highly strategic for all the reasons we've talked about.
We've added.
Probably doubled the size of that group over the past couple of years, we added someone to lead that capital market is actually a debt and equity capital markets for us in Asia for example.
Where we didn't have anybody on the other team over there yet.
On the equity capital market side that has not been in the <unk> was not in the fourth quarter, a major generator of fee revenue for us but was highly helpful.
In helping lead the IPO of next tracker for example, where we brought in one of the key anchor investors in that and that IPO. So both the debt and the equity side and are continuing to be very strategic the other piece of the business you didn't mention I think maybe you did.
Within that solution segment.
Our platform is our <unk> business, our public equity partners.
Business and the performance there was quite strong in the in 2022. So we see good LP. Good good engagement from investors and expect to expand that capital base. This year and then you mentioned the secondaries business, where you saw we made progress in capitalizing those businesses in Q4, we expect to make continued progress.
This year.
I appreciate it thank you Jeff.
Thanks.
Yes.
We will take our next question from Finian O'shea with Wells Fargo Securities.
Hi, everyone. Good afternoon, a question on the impact on climate franchise. This is an area with good tailwind and demand as you've noted the past couple of quarters can you talk about on the balance.
Incoming competition from some of your major peers, there and if that is driving a more challenging fund raising environment.
Then we would have thought a year ago.
Okay.
Patient is always a form of flattery.
Uh huh.
I think tells you that there is substantial interest in the marketplace, our peers wouldn't be coming in if there werent a lot of LP demand for this type of activity, which really highlights the value of our leadership position.
Over the long arc of private equity people have always underestimated the amount of market growth.
Many segments might have and I think what we're seeing today is very substantial.
Market growth, particularly around <unk>.
Certain sectors of the impact landscape.
As I've said before Theres, just a seismic change in what's happening in beauty urbanization and climate, but across other sectors like online at health care access post COVID-19.
<unk> inclusion.
If you thought of a landscape that sector as you might want to be involved and they overlap.
<unk> impact investing marketplace very strongly.
We feel good about our position and feel good about the flow we're seeing and.
We expect competition and we also expect to continue to grow against it.
Yes.
And we will take our next question from versus hone with BMO capital markets.
Okay.
Alright, thanks, very much maybe coming back to the FRE margin and thinking about it from the expense side can can you help us think about the jumping off point for fee related expenses heading into 2023 is the fourth quarter level roughly the right level for the first quarter and I suppose how are you thinking about your pace of hiring in 2023 relative.
2022, I use slowing your investment off any detail that would be helpful. Thank you.
Rufus.
Yeah, our <unk> expenses, obviously breakdown into two primary line items comp and benefits in Opex.
Benefits in Q4 was 102 and change million and I think that's a reasonable estimate for launching off largely off pads as you know sometimes what you see in Q4 moves around a bit in this industry. Because if you. If you haven't been accruing for bonuses as you end up paying them. It can cause a change in Q4 <unk>.
Case, we ended up right on our accrual for bonuses. So Q4 is a good reflection of the launching off pad four four comp and benefits.
This year I would expect that we're going to continue to invest in the business. So that should trend up a bit during the course of the year.
But a lot of that growth has occurred on the Opex line Opex for the quarter was $66 million roughly.
That two reflects.
All the factors, we've talked about full kind of returned to office a full return to a lot of travel both for deals and for fund raising.
Scott Thats, causing that number to come back up a lot of the public company expenses, we had to.
We had to account for that is all in that number now so likewise I think that is.
Roughly a good run rate number to think about as you think about this year.
Thank you.
Okay.
We will take our next question from Luke Nathan with BNP Paribas.
Hey, good morning, guys. Thanks for taking my question just a follow up on the fundamentals of portfolio companies.
Strong revenue growth and some pressure so I guess I'm just wondering if you can judge.
So EBITDA growth so portfolio companies and then just which areas are driving that growth is it b that across technology and health care.
And just on the other side are there any pockets of weakness within the portfolio that you see.
Yeah, I mean, just to take you through the qualitative let's start there.
In healthcare, we continue to see strong demand tailwind for procedures, which have really been more of a rebound from the loss losses of procedures and other and other health care activity more routine health care activity during COVID-19.
In the software enterprise technology business.
What we've seen it actually is it an increase in retention rates and particularly at certain points last year, we saw a longer sales cycle in terms of new customer conversions, although you guys actually improved improved a little bit.
But.
A little bit of a slowdown in the sort of the second derivative in terms of the rate of growth.
But the companies are hanging in there very well in our other technology, which we call Internet digital media.
Remains a persistent demand for content and streaming.
And that particular rebound in live events and.
In domestic tour into sort of pre pandemic levels. When we were exposed to that in a number of our companies.
Including CA.
Others, there has been a slowdown in AD sales.
On the consumer side, it's really a tale of two two different sort of.
Groups on the high end, we've seen very strong demand.
For the consumer.
If I can cruises and elsewhere on the lower end, where we have candidly less portfolio exposure.
We've seen.
No.
More of it more of an issue from inflation and a pullback in demand, although again, it's been a little little less exposure for us.
I think we've talked a bit about ryzen.
Horizon and climate, so that probably gives you a sense for it for those sectors. So that's how we think about the world from a sector perspective.
And EBITDA standpoint.
Strong growth there certainly continues to feel there has been particularly through the fourth 2022 in the fourth quarter. Some pressure from wage inflation or companies are important companies that have important relationships with customers. So most of the raw material price increases we've been able to pass through but there certainly is a lot of focus around.
Around wage inflation, and that's subsided a bit.
But but but that was sort of the primary cost item that.
<unk> through 'twenty two.
But overall margins or margins are stable.
Thank you. This concludes the Q&A portion of today's call I would now like to turn the call back over to Gary Stein for any additional or closing remarks.
Okay. Thanks, Shelby Thanks, everyone for joining us. This morning, if you have any follow up questions. Please circle back to me or empty otherwise, we'll look forward to speaking to you again next quarter.
Thank you. Thank you.
This concludes today's Tpg's fourth quarter and full year 2022 earnings call and webcast. You may disconnect. Your lines at this time and have a wonderful day.
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