Q3 2023 TPG Inc Earnings Call
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Good morning, and welcome to TPG third quarter 2023 earnings Conference call.
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I will now turn the call over to Gary Stein head of Investor Relations at TPG.
You may begin.
Great. Thanks Angela.
Welcome everyone. Joining me. This morning are John Michael Reed, Chief Executive Officer, and Jack Weingarten, Chief Financial Officer.
I'd like to remind you. This call may include forward looking statements 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 that earnings release will 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 Tpg's earnings release, which is available on our website.
Please note that nothing on this call constitutes an offer to sell or solicitation of an offer to purchase an interest in any TPG fund.
Briefly at our results for the third quarter, we reported GAAP net income attributable to TPG, Inc. A $15 million and after tax distributable earnings of $196 million or 56 per share of class a common stock.
We declared a dividend of <unk> 48 per share of class a common stock, which will be paid on December one to holders of record as of November 17th.
With that I'll turn the call over to John.
Thanks, Gary.
Good morning, everyone.
I want to start by acknowledging the recent tragic events and continued loss of life and 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 horrific events.
Turning to earnings it's been a busy and productive quarter with TPG.
We remained highly focused on our core business and are excited about the progress we've made across investing capital formation and organic initiatives.
[laughter].
At the same time, we've made substantial progress on integrating actual gordon into our firm and.
In my comments today I'll begin with a brief update on the HG transaction and then share some highlights from across our business.
We closed our acquisition of Angelo Gordon on November one.
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 provide.
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 desire amongst the largest institutional Lps to allocate more capital to.
To a shortlist of scaled GPS who can partner with them across multiple asset classes.
Two important private wealth channel, a growing demand for alternatives, especially and semi liquid structures.
Yield oriented asset classes like credit and real estate and.
And three in the insurance sector, a strong interest in partnering with alternative managers and 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 creative partnerships.
Although the transaction closed just a few days ago, we're already beginning to see the benefits of our strategic combination for.
For example in capital formation.
We've made key introductions, among our highly complementary client patients 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, who says fundamentally shifted.
We're 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 engaged with one another collaborating shared ideas and identifying opportunities to potentially pursue sizable transactions together.
We have also been working in a very rigorous and it's just that's just <unk>.
Systematic way to identify and prioritize joint growth opportunities.
This entails launching new products that leverage the expertise and intellectual property of our combined platform.
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 will be hosting a teach in with TPG sell side analysts to dive into Ags business in detail.
In connection with this we will publicly share our comprehensive set of materials on our website.
Look forward to introducing TPG, a deep bench of talent and differentiated investing style portfolio construction and growth drivers across our strategies.
Now I'll spend some time discussing how we have been driving growth and executing in our core business over the past quarter.
We continue to make progress on our fund raisers with $3 4 billion of capital raised in the third quarter, including successful closes and TPG capital line Health care partners to an H eight.
Each of our flagship campaigns remains on track to surpass the commitments of its predecessor.
We continue to have high quality dialogue with clients as we work toward final closes.
In addition to fund raising 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 topline growth and stable margins across our portfolio of 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 creative artists agency or see a a one of the world's leading entertainment and sports agencies.
The Artemis the investment company in France walking up.
We first invested in CAH 13 years ago.
The portion of our ownership.
EBITDA grew more than seven fold.
In 2021.
We sold.
From a commingled fund in.
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 this time and our recent exit which generated over two times our money in two years.
One of the most successful examples they continuation vehicle monetization to date.
In aggregate, both TPG capital <unk> investment.
And the continuation vehicle.
<unk> generated $2 4 billion of gains.
It is a cornerstone transactions, our long and successful track record and definitely behind the secular tailwind is media and content creation.
We've built a unique ecosystem in this 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 our a couple of manufacturer and seller of branded electrical wires and cables in India.
IPO was very strongly received with high quality interest from both domestic and international long 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 nomadic investment approach.
Have continued to generate differentiated opportunities for us in.
In particular, our deep industry expertise and proven ability to accelerate portfolio company growth.
<unk> TPG is 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.
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 platform a significant increase over the activity levels in the first two quarters of this year and our pipelines remain robust.
And TV capital, we closed the acquisition of Nex Tech a leading provider of electronic medical records practice management payments and related solutions for specialty healthcare providers next tech follows our thematic focus on health care provider efficiency tools and patient payments, which is reinforced by our successful investment in wealth Sky.
The deal team as co led by investors from both our healthcare and software and enterprise technology teams, which reflects the collaborative culture we've built.
TPG capital Asia.
We received shareholder approval last week to take invoked here private in Australia.
<unk> has spent many years tracking ego care you only add scale vertically integrated provider of funeral services in the region, we strategically.
We acquired an initial public stake in our company earlier. This year is a key step towards the eventual take private of the company.
Our impact platform, which invest under the <unk> brand continues to be a significant differentiator for TPG and positions us well as we move into the next decade of investing.
The 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 right platform was proud to be recognized recently fortunes 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.
<unk> 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 patient impact platform I'll discuss some recent examples.
Ryzen rise climate agreed to invest in Tata technologies.
One of Indias largest automated and aerospace focused engineering R&D services providers aim.
Amy to Decarbonize transportation.
This investment represents our second partnership with the top top family the first being with Tata Motors passenger electric electric vehicle business.
Given the strong relationship we've developed with Tata, we were able to restructure this opportunity on a proprietary basis ahead, because they potential public offering.
<unk> also agreed to acquire a majority stake in <unk>, a global leader in the supply and lifecycle management of refrigerant gases with first class recovery reclamation and repurpose repurposing processes.
This builds on rise thematic focus on supporting the circular economy and advancing the adoption of clean molecules can be global decarbonization targets.
Another particularly compelling area of investment opportunity for us today is real estate.
Global markets have entered into a highly unusual period.
In 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.
Marci 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 trepp 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 completed the $1 5 billion dollar transaction in partnership with digital Realty Trust to capitalize a portfolio of high quality data centers.
In northern Virginia, with more than 1 million square feet in total.
We also recently announced the one 5 billion tender offer to take inter best private, leaving Benelux based logistics wheat.
The team has spent a number of years building conviction.
And the compelling market fundamentals of industrial real estate in the region.
In developing our relationship with the Companys management team.
With stock trading down approximately 50% off its peak value.
We leveraged our knowledge and expertise to approach international about a take private resulting in this sizeable transaction.
In addition to our existing opportunistic equity funds, we have launched our new real estate credit strategy Trek up.
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 environment, we've 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 truck strategy in a few minutes.
Together with TPG AG real estate, we now have a combined real estate platform totaling $36 billion AUM.
As of September 30, and we're well positioned to play offense for several reasons.
We have combined dry powder or $15 billion we.
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.
TPG AG, we have expanded our geographic footprint to include Asia Tomorrow.
From our perspective, these markets are fragmented and particularly hard to enter from a standing start.
We believe the two decade long focus with Angelo Gordon and markets like Tokyo, and Seoul is incredibly valuable and advantageous.
And we have added a net lease capability, which provides attractive growth opportunities through a hybrid of the financing and real estate markets.
Before I wrap up I E.
Also what I spend a few minutes on our credit business.
As we'll discuss in more detail next week.
Entering the credit space with with a diversified multi strategy and scaled platform.
Well equipped to capitalize on the significant tailwind in this asset class.
<unk> activity and performance over the last several quarters and 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 that's accelerated demand for products that lend against cash generating stable assets. Additionally.
Additionally, the regional banking crisis earlier this year has further enhanced interest in this space.
In 2021, TPG Angelo Gordon identified a significant opportunity and raised over $1 billion for a first time asset backed lending book since activation team has already deployed over half of the funds capital into more than 20 transactions.
We expect to substantially scaled the strategy overtime.
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.
Our platform invested more than $750 million in the third quarter alone and our proprietary central housing business originated.
<unk> projects with more than $2 billion of associated land and site development costs year to date.
And finally, twinbrook, our middle market direct lending platform has demonstrated its resilience as a result of that sector driven strategy focused on high quality companies with strong covenant protections. Despite.
Despite increased volatility Twinbrook has note realized credit losses year to date and through the third quarter has deployed approximately $2 billion of capital into more than 20, new companies and over 150 add on investments to existing borrowers.
A few weeks ago, we held our annual TPG capital Investor Conference. We had 200 of our limited partners and the challenge together with nearly every professional on the TPG capital team.
We were able to highlight our strong momentum, including a differentiated investments. We've recently made in TPG capital Health care partners too.
That exemplify our distinct playbook in flywheel.
Although this event is focused on TPG capital, we have always had the leadership from all of our business units 10, and this year. We also include our Angelo Gordon colleagues.
Took the opportunity to showcase our talented team and further connections between our Lps and our 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 advisors participating.
Of all the events, we hold the CECO conference can be one of the most powerful examples of our ecosystem and accurate and we deliberately schedule with a long side of 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.
Thanks, John.
As a reminder, the results I'll be discussing reflect TPG on a standalone basis. They do not include Angelo Gordon.
The transaction closed subsequent to the end of the third quarter.
TPG had a record quarter for fee related revenues with <unk> of $321 million up 12% sequentially and 14% year over year.
This was the 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 a 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 of 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 <unk> growth I, just mentioned as well as continued strong expense management, resulting.
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 <unk> 56 cents 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 John 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 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 earlier 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 30th.
Would've 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 the $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 topline 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 continued 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 subsectors 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.
Realizations over the last 12 months.
Fee, earning AUM was 79 billion in AUM subject to fee, earning growth totaled $11 billion at the end of Q3 of which 9 billion, but not yet earning fees.
Moving to fund raising.
We raised $3 4 billion during the quarter and continued to make progress across our flagship fundraisers.
As John mentioned, we continue to expect each fund to be larger than its predecessor.
For TPG capital nine in healthcare partners, two we expect to hold final closes towards the end of this year.
For Asia eight we expect a final close in the first half of next year.
And for Rice III, we held a final close for the fund over the weekend, bringing total fund size to $2 7 billion.
This is a 24% increase from rise too and demonstrates the strong support from both our new and existing Lps.
As we complete these campaigns were experiencing nice momentum as we launch our next flagship campaigns.
First we recently launched fundraising for our sixth growth fund and are 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 are actively working towards launching the next vintage.
Finally, as we launch those next generation flagship funds, we're making solid progress across our 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've closed on approximately $650 million of this capital and we expect to close on the remainder as we raise additional capital for the truckload 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 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 are in excellent position to drive consistent meaningful and diversified growth across our business.
Now I will turn the call over to Angela <unk>.
To take your questions.
At this time, if you wish to ask a question. Please press star one on your telephone keypad.
Remove yourself from the queue by pressing star two.
Again, please limit yourself to one question.
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Okay.
Our first question comes from Alex Blaustein with Goldman Sachs. Please go ahead.
Hey, good morning, everybody. Thank you for the question I was hoping we could start with.
A quick discussion on the Angelo Gordon and I understand we're going to spend more time on it next week. So maybe this isn't a little bit of a preview but as.
As we look at some of the information you put out on the business a couple of weeks ago. It looks like fund raising and Angela Gordon was fairly muted I think it was only about $2 billion through the first half of 2000 2030, So help US let me unpack what were some of the sources.
Constraints in that business was that sort of deal related and uncertainty really good at.
How do you expect on raising to evolve from here absent of any sort of synergies with TPG.
Yes, Alex I can I can it's Sean I can.
Take a shot at that and Jack can add in as well but.
I think if you look at.
If you look at the fund raising momentum that Angelo Gordon had.
Prior to our transaction.
They had.
Substantial we made substantial progress across a.
A number of parts of their business.
And when we think it ultimately announced our transaction.
Think that as you would've.
Expected.
There was a fair there was.
There was a bit of a pause.
That.
I think it was.
No.
What.
On several fronts by the way.
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.
Wanted to understand whether or not there would be any changes in people.
Okay.
Et cetera. So.
That.
Not surprisingly I think a 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.
You hear from US directly so we have spent a fair amount of time.
Now going out together.
Even prior to the actual closing 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 <unk> meeting.
Which which basically cross all of their different strategies.
And it had an opportunity to do.
Your site chat in the front of the room I gave with identifiers like chat in front of the room as well as individual.
Individual.
While off meetings with a bunch of their Lps and this will be a continuing process but.
I think that.
The the reaction or response that we're getting.
Their LP base overall, I think now that we've had a chance to spend some time with them and we will continue to do that I think it's been very good.
And I think we've been clear about.
Angela Gordon will be will be position inside of the broader organization.
And.
It feels to me like we're.
We're getting back to sort of more business as usual.
What we've now closed the transaction.
And we will continue.
<unk> with 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 Lps desire to learn more and understand it.
But I think we're very confident coming out of it that we'll be able to accelerate capital formation together.
Yes, I would only add to that John 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.
Looking 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.
The acceleration of their fund raising as we enter next year.
Great. That's helpful. Thanks, and then my second question around Tpg's fundraising it's.
It's great to see you guys.
Come through with the existing campaigns and getting closer to the end of that.
You mentioned your I think are on track to launch climate.
For next year and just given the fact that we've seen a more challenging environment for our broader private private market moderating over the course of the year.
Different do you think this strategy will be received by helping you given that it is a little bit more nuance and idiosyncratic to you guys and their ability to set our upsized the cycle relative.
Relative to the predecessor is once that strategy.
Yes.
On the climate.
Alright.
So sorry go ahead Jonathan.
Look I would take a step back on the fundraising arc 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 where 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 have made both in terms of new business creation like the climate infrastructure fund that youre, referring to.
And the <unk> fund that we talked about and the acquisition of Angelo Gordons. 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 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 view 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 climate private equity fund.
And when you take all of what I talked about into account what Angelo Gordons funds the growth in credit the launch of climate, We expect fund raising activity to increase next year over this year.
Okay.
The next question comes from Craig Siegenthaler with Bank of America. Please go ahead.
Thanks, Good morning, everyone.
We wanted to FERC drags on the growth capital business good.
Good morning, Jack.
So TPG has almost $9 billion of unrealized value across growth four to five. So we're curious how are those portfolio of companies performing against the higher rate backdrop, and if you have any fresh data points like revenue EBITDA trends to date that would be helpful.
Sure, Matt So I talked about the overall.
Portfolio performance across our private equity portfolios and my comments Craig in growth. The same dynamics apply still strong revenue growth kind of probably mid teens in the growth portfolio.
Strong EBIT stronger EBITDA growth. So we're actually seeing margin expansion in the growth portfolio. So the portfolio health is quite good.
The broader growth equity market is very interesting and we continue to feel like we are.
We're very well positioned there.
Yes. It was obviously the market that saw the biggest spike in activity towards the end of 'twenty, one and kind of the.
The most active part of the market.
As you know from looking at our results we were relatively patients in that environment now.
Now.
With the IPO market, becoming more difficult some of those companies needing to raise follow on capital with our position as kind of a solution provider, adding more than just capital, where we're pretty well positioned to capitalize on that disruption in the market and you see that in both our growth and <unk>.
Funds I mentioned that we accelerated the first closed process and growth because we're seeing a pickup in investment activity. So that happened. After the end of the third quarter. So we'll be talking about it in the fourth quarter earnings call, our progress and starting to raise the next growth fund, but the reason we're accelerating it is because of the new investment activity.
Seeing.
Likewise <unk> T Ted.
Now over half deployed in the relatively new <unk> funds.
Okay.
The next question comes from Ken Worthington with JP Morgan. Please go ahead.
TPG generated meaningful carry and the continuation of fun and United artists This quarter and John you mentioned that you see opportunities to leverage continuation funds as we look forward. So maybe first are there more opportunities like United artists in your portfolios and is that something we can expect if the environment actually.
Remained challenging and then second.
Last quarter, I think you mentioned TPG back continuation vehicles.
Germany and the U S. So are there different ways for TPG to participating continuation funds either by asset class or regions as we look forward.
Yeah, Let me let me, let me take a shot at it.
I think first of all.
The continuation vehicle market.
And the evolution of that within private equity.
I would say continues to.
Become a.
More and more important part of the toolkit that firms like TPG or other firms for that matter have.
Clearly I think you've seen an environment where.
<unk> activity exit volume is lower.
I think that.
For what it's worth I think we would expect generally that trend to continue.
I think that given.
Whats going on in terms of volatility in the market.
Valuations.
We already we already talked about multiple compression.
And.
Just overall, the overall kind of dynamics of the exit environment I think you should expect that to continue.
To be.
Less active.
And.
In that context I think.
There's still a tremendous amount of pressure.
Within our industry to find ways of returning capital to Lps.
Somewhat constrained as a result of a number of factors, but one is one of the clear factors is.
<unk> is a slowdown and exit activity.
So I think that the continuation vehicle market.
Has become.
I think better understood and more and more accepted.
In the market.
I think that frankly.
Going back several years ago, I think there was a there was some level of hesitation on the part of Lp's generally too.
Understand what was going on with cheap with continuation vehicles.
And how that would affect their ability to both get capital out but also the dynamics of.
Assets moving from one fund to new vehicles, and things like that and I think over time, it's becoming much better understood part of the market.
So in that respect I think that we will.
Strategically look at using continuation vehicles for our own portfolio portfolio, where it makes sense.
I would say that we would say.
I still expect it to be sort of the exception not the rule in terms of the level of activity in terms of exits, but I do think that there are there is a place for it in the market and obviously <unk> is a great example of the type of company.
By virtue of our partnership with the management team for a very long time by virtue of having a view that that.
There was there was a significant amount of growth still in front of the company.
And it having been held in.
<unk> that.
<unk> had essentially.
Essentially timed out and so that.
The desire that we had to try to return some capital.
But also continue to be able to benefit from the growth made it a perfect example.
Why one might use a continuation vehicle. So we will use I think we'll continue to be and by the way. The success of the CAA vehicle I think gives us a tremendous amount of credibility with respect to the sources of capital in that part of the market.
On the other on the flip side, obviously the reason that we have stood up and are now fund raising for <unk>, which is our GP solution strategy is exactly the same the same dynamic which is that we continue to see more and more sponsors looking to partner with.
Capital sources that.
Understand.
How to value companies.
Ken Ken Ken.
Can be.
A.
Can really can really provide.
Evaluation and the.
The process of the CV that lp's can rely on and and.
And frankly in some cases, you have sponsors coming to <unk>.
<unk> for GP solutions, because they also know that we have deep sector expertise across a number of these different sector. So we view ourselves as being in an excellent position strategically in order to be a partner of choice in that market.
You mentioned a number of the deals we did but there has been really no abatement in terms of the level of deal flow that we're seeing in that market.
And so ultimately I think it's important that we get it's absolutely a strategy, we believe can be scaled over time.
And among the markets.
Private equity that we that we deal in.
Very few markets are under capitalized. This is one of them in terms of the capabilities of the firms that are active in this space. So we would expect it to continue to be a very good opportunity to form capital around.
The next question comes from Michael Cyprus with Morgan Stanley. Please go ahead.
Hey, good morning, I wanted to ask on the real estate credit strategy track Al I was just hoping you can update us on the build out of the platform there where youre seeing some of the most compelling opportunities to put capital to work now in the real estate credit marketplace. The types of investments and then how are you thinking of building out. This platform as you look out over the next three to five years just in.
In terms of how youre thinking about enhancing your origination capacity. Thank you.
Mike. Thanks for the question I think first of all.
Sure.
We're able to leverage.
Our origination capability that comes out of our public REIT.
So that.
That was obviously pre existing so we're already.
Well seeded into the market in terms of flows.
With respect to some of the real estate credit opportunities <unk> is really broader frankly in terms of the types of opportunities that we'll pursue.
So over time, we'll continue to add to our origination our origination capabilities.
We feel like were.
Well connected.
To this to the sources of flow if you look across both.
Banks in particular.
That are.
That are systemically under pressure.
Looking to shed assets in certain cases.
That's a clear opportunity for us in this market.
If you look at financing solutions that.
Certain real estate players have in the market right now, it's a very disrupted market as I'm sure you're aware and so as a result of that I think will be.
Because of our deep relationships across the real estate market as a result of.
Both our franchise building out a trap as well as Angelo Gordons franchise.
And a number of different markets I think we have deep credibility across the landscape.
As a.
As a financing provider.
That understands the market and understands the space.
So.
To us it really looks like a very.
Interesting and scalable opportunity overtime.
Real estate financing overall right now is a pretty broken market.
And and so I think.
As a result of that.
We expect.
Yeah.
By virtue of having a pool of liquidity to be able to do this.
Given our expertise, we expect to be able to be a valley.
Value add solutions provider.
And understand the risks.
Whats.
What the market is currently looking like there is also just a lot of.
Good.
Dislocation.
And what you would think of as public markets.
And publicly traded securities.
And the real estate world. So our expectation is that.
We will be able to flex between public markets and private markets as a result of having a pool of capital.
The team by the way the team at Angelo Gordon on the structured credit side is also seeing those types of opportunities as well.
No.
More to come on this but I think we'll we'll scale the business.
In a way that's consistent with what we what we see the opportunity to be.
And both in terms of resources footprint.
It's a great opportunity.
The next question comes from Michael Brown with <unk>. Please go ahead.
Great.
So as you noted John.
The addition of Angelo Gordon certainly gives you much broader diversification of capabilities.
To better service, the insurance industry and I'm sure I'm sure we'll hear more about this next week, but I just wanted to maybe hear a little bit about how you're approaching that channel or thinking about that playbook.
And maybe how long it would take you to meaningfully tap into the opportunity there and.
What's what's some of the incremental investment that maybe needed just to get you to where you want to be overtime.
Yes, I mean, it's a good question I think.
I think you heard in my.
In my prepared remarks.
The type of dialogue that we're experiencing right now has meaningfully shifted.
<unk>.
That is.
It's very tangible later just to put it in perspective prior to the Angelo Gordon transaction, we had dialog with a number of insurance companies that were lp's of ours, but really fundamentally only being able to serve them.
Private equity and real estate perspective, we also had a number of insurance companies, particularly life and annuity players that had approached us about a more holistic relationship but.
And wanted to understand what our plans were.
Before credit as an asset class overall.
And and so we had.
That were hard to execute on.
Post Angelo Gordon transaction.
We've had a very substantial.
I would say inflexion in the type and quality of dialogue that we're having with a number of players in the industry.
And those dialogues that dialogue has ranged from I guess, what I would describe that I put them in two categories, one would be <unk>.
General LP type relationships and credit strategies.
Participation in SMA or commingled funds.
The other would be a more strategic type of relationship similar to what you've seen other alternative asset managers.
Execute in the market.
So.
And we currently have several dialogues going on that I would put in that category exactly how long it will take to advance the ball on that.
Hard to say, but I would say that it is a very high level of focus for us as a combined firm now.
We havent team that we put together between TPG in AG.
That is sort of dedicated to focus on this I think over time naturally we will continue to attract some talent in the industry with respect to knowledge and understanding about.
For our life and annuity players.
What you would think of as sort of insurance solutions type of expertise.
So I think that will be.
We will be adding some capability in that respect overtime.
No.
It's a very exciting opportunity depression dining area for us now that we're together as one firm.
Because this is an area where I think we can play a very very.
<unk> role and if you look by the way at Angelo Gordons business.
Cross the credit spectrum.
One of the things that was really attractive to us about AG was that it's a multi strategy credit capability multi strategy credit platform. So the combination of.
Credit solutions.
On the corporate side.
Structured credit.
Asset backed.
Asset related side, and then Twinbrook, which is direct lending platform really.
Incorporates a broad capability that.
It really required for.
To fully service the.
The insurance industry and the insurance needs, so where we.
We're very focused on it we think we're well positioned now and obviously, we will keep everybody informed as we continue to.
Go down that road.
The next question comes from Brian Bedell with Deutsche Bank. Please go ahead.
Great. Thanks, good morning folks.
Good almost afternoon.
Okay.
And.
Most of my questions have been asked and answered but do you have one on the.
The LP conference.
And then related of course to rise climate and <unk>.
Climate infrastructure, just I guess in terms of the what you are hearing from the <unk> in terms of.
Demand for those two asset classes individually. So obviously the demand is very good for for energy transition, but how are they thinking about that for infrastructure and then I guess, what I'm getting at is what are they substituting if they've got limited capacity to invest.
What are they substituting either infrastructure energy transition for.
Look I think first of all I think that the.
The climate.
The climate <unk> strategy.
And also <unk>.
Transitional infrastructure.
Is.
I would say.
Kind of a frontier.
In our markets that is very very unique.
First of all I think we.
Having dedicated the resources that we've dedicated to the sector and the space now.
The better part of the last five years and building this capability.
Think that we're in a small.
Category with respect to the number of firms that are very credible in this space.
And.
For us it's been a very deliberate strategic build because we do believe that over the course of the next as I mentioned in my remarks over the course of the next decade plus.
The amount of capital required to solve some of these climate related issues is just absolutely enormous.
And the number of credible.
Solutions providers and partners that are in the market right now is actually quite limited.
And we view ourselves in a very distinctive category as it relates to what we've built and our capability.
I think what we're seeing from Lps.
Is that Lps are looking at this.
They're looking at this in a range of different ways, but I think what we're seeing from Lps as they view this.
As a hard to navigate part of the market.
And as a result of that because of our leadership in it.
The robustness of our dialogue mail piece in this area is really is frankly pretty pretty extraordinary and what we're finding from Lps as that theyre looking at this.
Depending there looking at this in a number of different ways. Some.
Look at this as sort of a <unk>.
Piece of their private equity strategy. Some are looking at this as sort of a part of some Lps have this innovation pool of capital and they're looking at their starting their allocation of capital from from the innovation pool and then ultimately we will.
Sort of mainstream it into their private equity allocations. This is too important area in too big an area for <unk>.
Large pools of capital amount to ignore.
So as a result of that we're seeing as Jack had mentioned before I mean, we're seeing.
<unk>.
Really strong engagement here really strong engagement.
I think Jack mentioned that we'll expect to raise more capital.
As we move into climate to any infrastructure, one that we will expect to raise more capital than we did in the first time.
And everything that we're seeing from LP. So far I think suggest that that is in fact the case.
We expect a pretty strong level of.
Of engagement from our Lps.
On the infrastructure side, what I would say too is that and I think Jack alluded to this when he said that think of these things are sort of in some respects.
Kind of joined at the hip.
What we're seeing in the market is that as the climate is climate technologies.
And the capital requirements continue to evolve at a fairly rapid way.
We're seeing kind of a natural trend that you've seen over time over the history of this business <unk> seen this.
An example in assets like real estate, where it starts with opportunistic and then it moves down.
Cost of capital spectrum, so things like core plus or core.
But we're seeing some of those trends in this market where.
Some of the capital requirements and therefore, the cost of capital required to fund these build outs of different parts of the industry.
Are quite large and and so we're seeing infrastructure capital move to it in a fairly aggressive way.
But.
What we're finding is that the relationship between the private equity pool of capital and in infrastructure pool of capital provides.
Provides a flexibility.
And puts us in a position to create solutions.
Four.
For different companies and different partners, that's really differentiated because of our knowledge base across the sector. Generally so I think that this is going to be one of the more interesting areas to watch we're in a very differentiated position and I expect that the the capital allocated.
To this sector is going to continue to meaningfully increase.
Yes, Brian I would only add just amplify John's comments that the breadth of Lps.
Interested in this area has expanded significantly if you think about the last the first one is climate somebody raised just two or three years ago.
Certainly since the first rise fund, we raised $7 six seven years ago.
The awareness among our LP base of the investment opportunity that capital needed in these areas has expanded significantly so while it may be the case that any one LP as more capital constrained today than they were two or three years ago I think as we embark upon this next wave of fundraising across climate generally the number of Lps array.
And the World who have identified this as an important investment area for them has increased significantly.
The next question comes from Adam Beatty with UBS. Please go ahead.
Alright, Thank you and good afternoon I appreciate your staying on making time for us I wanted to follow up on real estate.
On real estate, maybe a little bit more on the equity side. It was intriguing what John said before about potential sort of a multi decade opportunity. So right now tpg's position in some of the more resilient real estate sub sectors.
Certain areas of housing by industrial life Science its.
I'm, just wondering whether youre thinking about.
Deepening the involvement and investment in those areas or maybe seeing opportunities in some of the worst favorite real estate sectors like office or retail and then if you could maybe just a quick thumbnail on what Angelo Gordon brings in the areas of value add and triple Matt Thanks very much.
Yes, I think.
I would say that.
We are very <unk>.
Sector focused as you know.
That's been sort of a core underpinning of our strategy and I would say sort of whats got us here.
In terms of being very deliberate about where we're investing capital.
And how we are investing it.
And and.
And so.
With respect to your question on maybe do we look at some of the less favored areas I would say in general one of the things Thats kind of March our approach.
Two investing on the equity side is that we have looked at different sectors over time.
We've done our work on them.
And if we felt like.
The opportunity wasn't quite there yet either from a valuation perspective, where fundamentals perspective.
Right until that opportunity is upon us and we did that actually by the way.
And then in sectors like for instance, hospitality.
We had not really been involved much in hospitality until.
We got through Covid, and we saw an opportunity to actually make a couple of investments in that space with respect to office retail right now I think we view the market as sort of sufficiently dislocated.
And sufficiently uncertain.
I think in the near term.
We probably don't see.
Compelling enough opportunities there.
But obviously, we continue to watch it but right now our office exposure on the on the TPG side is I think 2% of our portfolio. So it's probably not an area that we're going to go anytime soon.
I think the what.
What's more interesting about the market right now is sort of what I said in my comment in my prepared remarks, which is that.
We're seeing things that really kind of need to happen right now because I'm sure investors desire and need for liquidity.
And.
And at need for liquidity and capital and as a result of that it's creating a dynamic where we're seeing.
Larger discrete actionable opportunities in core sectors that we know very very well and we still like fundamentally.
We still like the fundamentals in those sectors.
So you know the.
The take private that we're doing in Europe right now as an example.
It's about short of 80% industrial 20% office.
They are exiting the office exposure, that's within that portfolio and they've been in the process of doing that so it's really an industrial play.
And.
It's a that's a part of the market that we've been watching for a while it's really the sort of industrial corridor between Rotterdam, and the porch down into Germany, and so it's an area that.
We've watched for awhile.
Order to enter harder to get access to it but this gave us basically an entry point that we thought it was compelling.
Similar situation for the data centers that we.
That we are engaged in.
In in Northern Virginia, which is sort of the core of the core data centers.
Hard to enter the market without either having to pay too much.
<unk> be able to do it with enough capital deployed so this gave us the opportunity to do that.
We're working on another industrial deal that will hopefully be signed very soon.
That is in North America, but we also think is sort of kind of core of the core as it relates to industrial. So we think these are great risk reward opportunities now as a result of pricing.
And and <unk>.
And we are there.
Just a general dislocation. So I think we will continue to be focused on that I mean on the Angelo Gordon side.
The annual growing business.
<unk>.
Does a number of different things for us as a combined effort one is that I mentioned.
In my remarks was geographical.
Penetration that we haven't historically had so the Asia business as an example.
It's very hard to enter market.
And Angela Gordon it's been in that market for some time now show.
Kind of a compelling opportunity for us to.
Be able to continue to grow that and I think our footprint as a firm in Asia on a fee on the <unk> side and <unk>.
Footprint on the real estate side, I think provides an opportunity to potentially continue to scale that and continue to build that.
On the net lease side I think net lease is a business that we've actually looked at.
Prior to the Angela Gordon acquisition.
<unk>.
In this environment, given what's gone on with the regional banks.
And the lack of financing availability net leasing a lot of respects as a financing product.
Corporates that are looking to use assets in order to get to.
Cost effective financing. So we think this is actually a pretty good environment to try to build on.
What is the core of our net lease strategy in AG. So.
You'll hear more from us about it but that's that's that's our perspective.
The next question comes from Luke Nathan with BNP Paribas. Please go ahead.
Yes. Thanks for taking my question guys and I. Appreciate this may be further more detail next week, but my question is on Angelo Gordons FRE margin.
Which is 23% in H one I'm just wondering how quickly you think that can scale. I think you had mentioned previously the mid to high <unk> and then longer term is there any reason why the FRE margin of Angelo Gordon Shouldnt be in the Forty's like a TPG standalone. Thank you.
Yeah. Good question, we will talk more about this next week, but.
One of the things, we really liked about the Angelo Gordon platform, John talked about the breadth of it and how important that is for things like the insurance market.
But having the multi strategy coverage of virtually every aspect of private credit was super important to us as we thought about the right platform to grow from now it's also expensive to support all of that to build an operating platform to support each of those businesses and they have fully built out.
Scalable operating platforms to support each of those businesses. So now as we come together as a combined firm find additional synergies and ability to operate better together and scale their businesses, we absolutely expect that.
We will get there margin our combined really what we're focused on now is our combined margin and getting it beginning the same margin expansion opportunity that we saw for TPG on a standalone basis, we now see for the combined business and I think your comments over time that their credit platform. If it were a standalone company and scaled should get.
Into the Forty's is absolutely correct.
Okay.
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.
Great. Thanks, Angela and thanks, everyone for joining us today, particularly on such a busy day appreciate it and if you have any follow up questions. Please feel free to circle back to us.
We will look forward to speaking to you again next quarter. Thank you. Thanks, everyone.
This concludes today's TPG third quarter 2023 earnings call and webcast. You may disconnect. Your line at this time and have a wonderful day.
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