Q4 2023 TPG Inc Earnings Call
Please standby your program is about to begin.
Good morning, and welcome to the TPG is fourth quarter and full year 2023 earnings conference call.
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Please go to T. P Ge's IR website to obtain the earnings material.
I will now turn the call over to Gary Stein head of Investor Relations at T. P. G. Thank you you may begin.
Great. Thanks, operator, and welcome everyone.
Joining me. This morning are John Michael Reed, Chief Executive Officer, and Jack Weingarten, Chief Financial Officer. In addition, our executive Chairman and co founder, Jim Culture, and our President Tae Sik.
We'll be available for the Q&A portion of this morning's call.
I'd like to remind you. This call may include forward looking statements that do not guarantee future events or performance.
Please refer to Tpg's earnings release, and SEC filings for factors that could cause actual results to differ materially from these statements.
TPG undertakes no obligation to revise or update any forward looking statements, except as required by law.
Within our discussion and earnings release were PS.
Presenting GAAP and non-GAAP measures, reflecting the close of the Angelo Gordon transaction on November one 2023.
We also presented pro forma GAAP and non-GAAP measures that assume the transaction closed on January one 2023.
Please refer to Tpg's earnings release for details on the pro forma financial information.
We believe certain non-GAAP measures that we discussed on this call are relevant in assessing the financial performance of the business. These non-GAAP measures are reconciled to the nearest GAAP figures and 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 TPG in a $13 million after tax distributable earnings of $206 million or <unk> 51 per share of class a common stock.
We declared a dividend of 44 per share of class a common stock, which will be paid on March eight to holders of record as of February 23rd.
With that I'll turn the call over to John.
Yes.
Thanks, Gary Good morning, everyone.
23 was a transformative year for TPG and I'll begin today by sharing several updates on our progress.
Last February earnings call, we laid out the growth agenda for the year that included three key components.
First scaling our existing strategies and in particular completing several important fundraisers.
Second continuing our strong track record of driving organic growth and innovation.
And third expanding our business through targeted acquisitions.
We're excited about the progress we've made in all three of these areas.
Looking at our business today, we manage more than 220 billion across private equity credit and real estate and we further our position as a scale differentiated investment firm.
I'll review a few highlights for the past year and also discuss our outlook.
First as it relates to existing strategies, we have completed the fund raises for the next generation of our TPG capital Health care partners and rise stocks, we have grown our fund sizes vintage over vintage across each of these campaigns, which is a significant accomplishment given the persistent industry headwinds and private equity fundraising.
This is a direct result of Tpg's differentiated investment strategies outstanding performance track record and.
Our strong and growing client relationships.
Specifically for TPG capital nine and health care partners. Two we held our final close with $15 $6 billion of aggregate commitments up 10% from the prior vintage and for rise three we closed on $2 7 billion up.
24%.
In addition to expanding our existing relationships. We also added many new clients TPG from around the world with notable progress in the Middle East and Asia. We believe these new client relationships create significant potential for embedded growth and successor funds as well as the opportunity to expand engagement across additional TPG TPG strategies and products.
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For our ongoing capital Asia campaign, we have raised $4 3 billion of capital as of year end and we will hold a final close in the coming months.
Our clients continue to express strong interest and we expect the fund to be larger than its predecessor.
Second we continue to demonstrate our ability to grow organically by launching and scaling products and parts of the market, where we have distinct competitive advantages I'll highlight a few of these initiatives.
Our new real estate credit strategy received more than $750 million of commitments and closed on approximately $650 million in the fourth quarter. We are now actively investing in the current market backdrop is one of the most interesting environments. We've seen since the early two thousands for real estate credit given the dynamics at higher rates declining asset values and a.
Second pullback in commercial real estate lending.
Our strategy is purpose built for this part of the cycle and we intend to continue to raise capital in 2024.
Turning to climate at Cop 28. This past December we announced the $1 5 billion dollar commitment to the next generation of TPG rise climate private equity funds funds.
From Altera, the UAE 3 billion climate focused investment manager.
This includes a 1 billion dollar commitment to our second rise climate fun, and a $500 million commitment to our new global South initiative.
The UAE selection of TPG as its first private equity partner is a testament to the strong brand and leadership position, we built in the climate impact space.
Within our climate strategy. We're also preparing to launch our inaugural climate transition infrastructure Fund and just last week, we announced that Scott Leibowitz will be joining TPG later this year as the head of infrastructure for TPG rise climate.
Scott Most recently served as a global co head and co CIO of infrastructure investing at Goldman Sachs and we're excited for him to help bring our differentiated strategy to market.
Finally, we closed the acquisition of Angelo Gordon and the fourth quarter meaningfully expanding our capabilities across credit real estate and further enhancing our presence in Europe and Asia. We believe the acquisition of Angelo Gordon will be a significant growth driver for the firm and a number of ways. One key area is furthering our penetration in high growth distribution channels, such as private wealth.
And insurance and so far this year, we have secured new distribution relationships for our direct lending BDC and credit solutions fun with several large wire houses and private banking partners we.
We are focused on delivering additional products that provide private wealth investors access to our strategies and we look forward to sharing more with you in the future.
We also continue to make progress on standing up new revenue opportunities and businesses that leverage the combined expertise and capabilities of TPG in EG.
The most near term is the ability to generate incremental fee revenue from the integration of our capital markets business into TPG AG credit, which as all of which is already well underway.
Our strategic growth initiatives over the last few years have led to a step function change in our business through both organic innovation and the acquisition of AG, we have substantially expanded the breadth of our franchise across private equity credit real estate and soon to be infrastructure.
As a result, the cadence and consistency of our capital raising and overall growth profile. That's fundamentally changed we will be in the market on a steadier more consistent basis across both the institutional and private wealth channels.
Looking ahead, we expect our growth this year to be driven by five primary vectors, including one credit fundraising across all our TPG AG strategies.
Two the newest vintages of our growth and rise climate private equity funds.
Three the launch of our climate transition infrastructure strategy.
For the completion of several first time fund raises including real estate credit and G. P secondaries, and five new product and channel development.
Turning to our fourth quarter results, we had a strong year and we had a strong end to the year with $8 8 billion of capital raised in the quarter, primarily across the campaigns I discussed earlier.
We believe we are well positioned with $51 billion of dry powder to deploy into what we view as an improving market backdrop.
You may remember that during our second quarter 23 earnings call. We discuss several factors that were contributing to a ramp up in our transaction pipelines, including narrowing bid ask spreads greater receptivity among corporates to strategically realign their businesses.
And G. P is increasingly seeking creative solutions for monetization.
These forces have been accelerating and TPG has continued to deploy capital by leveraging our long dated themes and core strengths such as executing corporate carve outs and structuring proprietary creative financing solutions.
As we look ahead in areas such as real estate, we expect to see more attractive assets for sale. This year that would otherwise typically not come to market as companies find themselves under increasing pressure for liquidity.
In private equity given tpg's deep sector focused.
Commitment to business building, a strong track record of structuring win win transactions, we continue to be a partner of choice for companies looking to screech to strategically reposition their businesses and helped drive growth.
And in credit as we mentioned during the TPG HGT Chen the opportunity set continues to expand and we see we expect a significant increase in deployment this year, which will grow our base of fee, earning AUM.
Your origination pipeline is robust across all of our credit platforms as borrowers seek alternatives to public debt financing with greater flexibility to meet their needs.
We also expect a more active M&A pipeline as the economy continues to show signs of steadier growth leading to new origination opportunities.
Our investment teams have been very busy deploying nearly $12 billion in the fourth quarter.
Appointment picked up significantly across our platforms in the second half of the year and we invested over $22 billion of capital in 2023, we expect our ROE base robust pace of deployment to continue in 2024.
Looking briefly at activity within our private equity strategies for capital Asia 2023 was a record year for deployment with investments closed almost every region, where we operate in the fourth quarter alone. We closed three transactions, including a very interesting platform building investment that combines several hospital groups in southeast Asia.
This unique transaction led by our existing portfolio Company Columbia Asia creates one of the largest hospital ecosystems in southeast Asia and aligns with our thematic focus on building regional platforms of scale with high strategic value.
And our growth platform, we expect to see greater deployment across both our growth and tech Adjacencies funds in 2024 as companies address pressing needs for primary capital as well as pressure for secondary liquidity.
We raised $1 1 billion of capital for our sixth growth fund during the Rolling first close in the quarter and activated the fund.
Our impact platform has remained extremely active with <unk>.
Strong investment pace across both our rise and rise climate funds.
Our first rise climate is now approximately 75% invested and reserves across a diverse portfolio of 21 companies that grew revenue nearly 30% in 2023.
Additionally, our two Ipos last year next tracker and Tata technologies at both traded off more than a 100% from their respective IPO offer prices and we recently monetized a portion of our ownership in.
And next tracker.
We are well positioned with strong momentum as we prepare to launch our second private climate private equity fund.
New climate transition infrastructure strategy.
Turning to our credit strategies.
Our middle market direct lending platform TPG Twinbrook has maintained its strong performance to our sector driven strategy and disciplined approach in providing loans at the top of the capital structure with robust covenant protections. Despite the volatile market backdrop in 2012 during 2023 Twinbrook had no.
Realized credit losses, and deployed nearly $3 billion of capital on a pro forma basis into more than 30, new companies and over 260 add on investments to existing borrowers.
Our corporate credit strategy credit solutions.
<unk> performed well during the quarter and this contributed to its excellent full year results and 2023, both the U S high yield and leveraged loan indices were up over 13% in each of our active credit solutions funds outperformed these indices by several hundred basis points in <unk>.
Terms of capital activity credit solutions invested more than $1 2 billion in the fourth quarter, notably in a number of bespoke privately structured financing transactions and deployed nearly $2 7 billion of capital in 2023, both on a pro forma basis.
In addition, our essential housing business originated financing projects during the year with more than $4 billion of aggregate land and site development cost.
Turning to asset based lending and specialty finance these strategies have become an increasingly important part of the private credit ecosystem.
Clients are looking to diversify underlying cash flows away from corporate EBITDA and ship fixed income allocations to private structured credit opportunities.
In addition, public securitized credit continues to trade with an attractive excess spread relative to corporate credit.
Finally last year's regional banking crisis further enhanced both the investment opportunity set and client interest in the space.
As a result of the dislocation in traditional structured credit providers, we have already deployed more than 60% of TPG Ags and normal asset based private credit fund and more than 30 transactions and we expect to scale. This strategy over time.
And in real estate, we continue to see compelling opportunities to acquire track attractive assets from sellers in need of capital in need of solutions capital.
For example in the fourth quarter, our trip fund acquired a majority interest in two class a industrial business parks in the greater Toronto area, which we view as one of the best performing industrial markets in North America, with a sub 2% vacancy rate and high barriers to entry.
Additionally, TPG AG real estate at $7 $3 billion of dry powder at year end with dedicated funds in the U S Europe, and Asia and a global network of approximately 200 operating partners TPG AG real estate is well positioned to deploy its flexible and opportunistic capital across a range of attractive opportunities.
Finally, I want to highlight TPG next which completed its inaugural investment this quarter individualized group, a new investment manager TPG will serve as a significant anchor investor and Visualizes private equity strategy and will provide the firm with institutional resources to support business building and scale.
This strategic partnership is a strongest ample of our commitment to augmenting diverse leadership within our industry and we look forward to continuing to seed high potential investment managers.
Although we remain cautious due to the uncertain macro environment characterized by increasing valuations anticipation of fed policy decisions and significant geopolitical tensions 2024 is off to a very active start for TPG. We have a robust pipeline of interesting investment opportunities. We are engaged at high quality.
I, along with many existing and new clients and we see a number of levers to drive further growth and innovation across our business we.
We have a lot of work to do this year, but I'm confident in our ability to continue to deliver for our clients and build long term value for our shareholders.
Now I'll turn it over to Jack to review our financial results.
Thank you John as Gary mentioned earlier I'll be discussing our results today on an actual basis, which include two months of TPG TPG Angela Gordon from the acquisition close date of November one through December 31.
In our earnings release, we have also provided pro forma financials for.
For the fourth quarter and full year, 2023, which assume the transaction closed on January one 2023.
We ended the year with $222 billion of total assets under management up 64% year over year. This was driven by 75 billion of acquired AUM $16 billion of capital raised and value creation of $7 billion, partially offset by 10 billion of realizations and 1 billion of outflows over the last 12 months.
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As John mentioned, we had a strong quarter for fundraising due to the final closes across our capital and rise funds as well as the rolling first close of our growth fund.
The earning AUM increased 76% year over year to $137 billion.
And we had more than $51 billion of dry powder available to deploy.
Representing a 38% of fee, earning AUM.
We also had AUM subject to fee, earning growth of 24 billion at the end of the year of which 14 billion was not yet earning fees.
This represents a significant embedded growth driver of potential management fee growth as we deploy this capital and particularly across our credit vehicles.
Fee related revenue was $465 million in the quarter up 45% sequentially and 51% year over year and $1 3 billion for the year up 23% from 2022.
Management fees totaled $396 million in the quarter.
Grew 42% sequentially due in part to the inclusion of TPG a G. In our results as well as substantial catch up fees related to the final closes for the capital it rise silos.
Transaction fees increased 79% sequentially and 20% year over year to $55 million in Q4, a record level and totaled 108 billion for the full year.
Our fourth quarter transaction fees were elevated by the closing of several large transactions, where TPG was the sole or lead arranger for the debt financing.
As John noted over time, we expect to drive growth in transaction fee revenues as we expand our broker dealer capabilities to TPG AG.
However, Q1 is often a seasonally light quarter for deal closings as we saw last year and we expect that to be the case again this year.
Fee related earnings were 226 million for the fourth quarter up 45% sequentially and 62% year over year.
And $606 million for 2023 up 34% from 2022.
Our FRE margin was 49% for the fourth quarter and 45% for the last 12 months of 350 basis point improvement from 2022.
On a pro forma basis, assuming the AG acquisition closed on January one.
Our FRE margin would have been 47% for the fourth quarter and 40% for the full year.
It is important to note that these pro forma margins were elevated by the significant catch up fees and transaction revenues in the fourth quarter.
As we've discussed previously our normalized margin is blended down through the inclusion of TPG AG and we now have a meaningful opportunity to drive profitable growth through our margin expansion, we expect our FRE margin to exceed 40% for the year in 2024, as we realize operating leverage and synergies from the integration of <unk>.
Scaling of our business.
While also investing in growth initiatives that we've described.
We will continue to maintain strong expense discipline and over the longer term, we expect our margin to scale back up to and exceed 45%.
After tax distributable earnings for the fourth quarter were $206 million or <unk> 51 per share of class a common stock include.
Including $19 million from realized performance allocations are.
Our realization activity last year reflected our bias in a volatile market to focus on building value in a relatively young portfolios.
And we remained selective in our exit activity.
That being said as markets have begun to normalize our pipeline of potential monetization has increased.
Swimming markets remains supportive, we expect realized performance allocations to increase in 2024.
In the fourth quarter, we also incurred $18 million of noncore expenses related to the closing of the Angelo Gordon acquisition, which is included in our realized investment income and other line item.
While we will continue to incur ongoing integration costs. We expect this to normalize now the transactions closed.
Turning to our non-GAAP balance sheet, we used a portion of our cash and revolver capacity to fund the closing of the HG transaction in the fourth quarter. We ended the year with $105 million of cash and cash equivalents, approximately 500 million drawn on our revolver and $450 million of other long term debt as.
As I've mentioned previously we upsized, our revolver from $700 million to $1 2 billion last September.
And currently have approximately 700 million of Undrawn capacity.
Our balance sheet post closing remains conservative with moderate leverage and ample liquidity.
Our net our net accrued performance balance at the end of the year was 891 billion compared to $692 million in the third quarter. This.
This 29% increase was driven by a $141 million of accrued carry attributable to TPG AG.
At the acquisition date, and the $77 million increase in the value of our investments, particularly offs, partially offset by $19 million in realized gains.
While our operating model is FRE centric, we have significant embedded performance related earnings potential and we expect our financial results will benefit from the eventual pickup in realizations.
At the end of the year, our performance eligible AUM totaled a 100.
Third $92 billion.
We're 87% of our total AUM.
Of which $151 billion was performance fee generating.
Our portfolio has continued to demonstrate resilience through a period of high volatility underpinned by our deep sector expertise and careful investment selection and assets with strong growth in durable margins are.
Our private equity portfolio, which includes our capital growth and impact platforms appreciated.
I appreciate it approximately 4% in the quarter and 9% over the last 12 months in aggregate our portfolio of companies grew revenue by more than 20% over the last 12 months.
The operating environment is normalizing our portfolio continues to demonstrate strong cost management and stable margins.
TPG Ags credit.
<unk> appreciation of 4% in the quarter and 14% in 2023 on a pro forma basis was driven by strong credit selection and a low annualized loss ratio across the portfolio.
Our strategy has also benefited from the broad credit market rally heading into the end of the year.
In real estate the performance of our portfolios reflects the broader challenges in the sector, resulting from higher rates, although the fundamentals across our underlying core sectors in assets remains strong.
Looking forward I'll reiterate the guidance that we provided at our teach in in November.
We expect our total private equity and infrastructure capital raised in 2024 to grow compared to 2023.
Driven by the fund raises for growth and rise climate as well as the launch of our climate transition infrastructure strategy.
Additionally, in 2024, we expect fundraising for TPG AG credit to exceed $10 billion more than doubling the capital raised by the platform in 2023 on a pro forma basis.
On credit deployment as John indicated we expect a significant increase in each of our core strategies this year, which will grow our base of fee, earning AUM.
Stepping back we're excited about the progress we've made over the past two years and executing against our strategic priorities.
We've scaled and diversified our business, while maintaining a strong focus on delivering excellent returns for our clients.
Looking forward, we are equally excited about our path ahead, we have great visibility into the next phase of our growth with multiple levers to expand our asset base and drive revenue growth and operating leverage we're confident in our ability to continue delivering differentiated performance for our clients and long term value for our shareholders.
Now I will turn the call back to the operator to 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 will take our first question from Alex Blaustein with Goldman Sachs.
Hey, good morning, everybody. Thank you for the question.
My first question is around credit.
I just got two quick parts to it. So the first is here you on the expectations for accelerating fundraising and I think you reiterated over the $10 billion number you talked about previously.
Can you just spend a minute on what that comprised off in terms of the key strategies, but also how much of that growth instead of like embedded legacy.
AG relationships or you're also incorporating some of the incremental cross selling opportunities that we talked about between AG and TPG.
And then on the deployment side and that's the second question here I was just.
Curious within the $132 million of sort of shadow fees, how much of that is related to credit.
Thanks, Alex I'll start and then.
We'll see if we dig that out but.
We'll follow up with you but.
First of all on.
And the capital formation side, I think that we expect.
A healthy mix between capital formation from existing relationships.
That the AG credit team currently has.
And we're actively involved in those dialogues really across the strategies.
We also expect that.
As we've talked about before.
Given the lack of overlap in the LP base of both TPG and AG that there continues to be a exceptional opportunity for us to expand the breadth of capital formation.
Two relationships at TPG has that a G is being introduced to now and.
I think you and I have talked about this before but we're spending a lot of time.
Even since even since the.
Prior to the close but certainly post close we're spending a lot of time.
With our capital formation team focused on expanding the breadth of those relationships on the credit side and we feel like we're making good progress. So I would expect that when we finish this year that will have a nice broadening and deepening of AG credits relationships that will contribute to that and also form the base for <unk>.
<unk> growth in those strategies.
I think I mentioned in my comments, we're also in the market with and.
And in process of.
A number of vehicles for TPG AG credit.
That will be.
Raising capital in the in the in the wealth channel.
And that'll be a continued focus of ours in terms of expanding the.
The access and reach in the wealth channel and creating multiple vehicles for each of these strategies. So that the capital raising also becomes more of an ongoing capability.
As we expand that reach and I think I mentioned, we have a number of channel partners that.
We have already.
I've already started that process with us so I would expect to see deeper and further penetration there as well given this.
The ink the increase in.
The brand recognition with TPG together as well as frankly, the track record that they've created as a result of the investing activity. So I expect to see that as well.
And I think that.
As I said, we're in the market with all of our credit strategies and.
And so expect that the growth in fundraising will occur it's hard for me to say exactly how it will break down between the three different pillars of our credit strategies, but the growth will occur across all three.
Hey, Alex This is Jack on the on your question about the 132 million of estimated annual fee opportunity from both.
AUM, not yet, earning fees and subject to the step up is.
That's weighted toward the AUM, not yet earning fees as you'd expect probably a $100 million of that is in that bucket of 30 years or so is in the fee step up category.
And within the AUM, not yet earning fees the biggest components would be across Ags credit real estate businesses, probably half of that call it $50 million of the 100.
And the remainder kind of weighted towards tpg's growth and real estate platforms and in the in the AUM subject to step up that $30 million. The biggest components of that would be in the capital platform could you remember we had the J curve mitigate structure in some of our capital that steps up as we invest capital and about $10 million in the.
In the AG real estate business.
Great. Thank you both.
Okay.
The next question comes from Ken Worthington with J P. Morgan.
Hi.
Okay.
Ken.
Okay.
Alright.
Through a more aggressive realization phase a carrier to the IPO Ken Ken.
Ken you broke your first part of your question broke up we couldn't hear you can you start again, yes I apologize.
As we think about net accrued carry.
Called out a number of times that you went through a more aggressive realization phase prior to the IPO, but if we looked at the accrued carry today by vintage.
Percent is older than five years and it would seem like realizations should be front end loaded how do we think about 2024 from a realization perspective.
The market environment remains benign and can you remind us how the European waterfall structure and the Angelo Gordon funds should reasonably play out over the next few years.
Todd you want to commentary realizations on the private equity side first.
Yeah, Let me let me I'll start on that this is certainly an area.
We spend a lot of time focusing on as a partner group. It's important to our investors is important to our good fund management.
And we spent the last few years.
Really investing in our companies and we have some very well performing companies I think should be in a good position to realize value.
The year and years ahead.
It is worth noting we've had some important successes in recent quarters I think we mentioned the sale of <unk> in the second half of last year, which was a strong exit that was again to your point about duration that was a 13 year partnership and we waited and really picked our spots.
We also had actually an important realization in recent weeks, we saw a sizable block of shares in next tracker, which is the company went public in the first quarter of 'twenty three is up about 130% from its IPO price.
One more example, just to how we really are able to pick our spots, particularly in the private equity side over the last two years, we launched seven Ipos in India.
And all of the positions that we still hold or are trading well above their IPO offer price of course, ipos are leading indicators of liquidity. So.
There are some opportunities there. So so dividends are important recent successes, but overall.
The start of your question, we've been selective and we've really been building value in the portfolio. After a very big cycle of realizations in 'twenty, one 'twenty two.
But as far as the go forward, we're very focused on driving liquidity as a firm and as the market recovers.
We are actively managing director liquidity as a partner group in each business unit and with in <unk>.
With the growing momentum in the overall deal market and the strength of these portfolio companies. We do feel like there's going be an increasing number of opportunities to drive liquidity. This year.
Okay, great. Thank you.
Yeah.
The next question comes from Michael Cyprus with Morgan Stanley.
Hi, Good morning, Thanks for taking the question just wanted to come back to the private wealth opportunity I was hoping you could maybe elaborate on the positioning now that you guys have within the private wealth marketplace, maybe talk to some of the products that you have I think you alluded to bringing some new products to the marketplace as well.
How are you thinking about that what sort of traction are you seeing on the existing products in the marketplace, maybe talk to some of the steps that you are looking to take here in 'twenty four thank you.
Yes, well I think.
We've been actively engaged in dialogue with.
A number of channel partners.
And I think.
Mike you know that.
Prior to the <unk> acquisition.
<unk>.
Raising some capital through a private equity or real estate strategies through those channel partners was a routine part of what we're doing.
<unk>.
Essentially campaign by campaign.
The relationship dialogue now is taking a complete these sort of different step function. It's about it's like a step function change because with.
With the expansion of our strategies as a result of the <unk> acquisition.
And the ability to offer more continuously offered vehicles.
Such as Bdcs et cetera.
You know that.
And any preexisting dialogue that <unk> had with a number of channel partners. We've come together now and we've been having a series of really kind of a strategic dialogue with our channel partners about.
A more holistic approach to how we're approaching that channel and.
I've actually had several of those meetings myself over the course of the last month or so.
And what I would say to you is that there is a very strong appetite from the wealth channel partners and having a more holistic product offering from TPG are theres a strong desire in the channel I mean, you obviously know what the data looks like yourself in terms of the available capacity and.
The wealth channel wanting to allocate to various strategies.
And.
We're seeing that.
We're seeing strong demand.
For having some level of diversification and brands that are there.
That are.
Driving product through the channel and so as a result of that.
I would say that.
We're very encouraged by what we're hearing from those channel partners and we're actively deploying into those opportunities. If you look at our resource here.
Our resource as a result of the combined two firms more of that more than doubled in terms of our team that's focused on the penetration of the channel.
Product creation product structuring as well as essentially feet on the street and from a from a marketing and relationship management point of view and so.
That's been a noticeable step function change for us.
So we have products that are up in the channel and we will continue to be across our.
Direct lending business for Twinbrook.
We have products that are.
Upon the channel for our structured credit business.
And <unk>.
And besides obviously some of our private equity strategies that we're also going to offer through the channels. So it's now looking like a complete menu of product capabilities.
I should have mentioned also including our real estate capability as well. So it's now looking like a complete menu.
And.
Our brand is a very strong brand.
And it's and is gaining more and more traction.
In the channel as we continue to as.
As we continue to put resources behind it so.
We're feeling pretty good about.
What we expect to do in the in the wealth channels over time.
And I think it will and we've said before I think over the course of the last two years, we've talked about it.
Objective four strengthening our distribution base, there and also having become a larger part of our sourcing of capital.
And we're on a path to do that.
Great. Thank you.
Yes.
The next question comes from Craig Siegenthaler with Bank of America.
Hey, good morning, everyone.
So for my question I wanted to hit on the FRE margin target.
There are 47% pro forma ethylene margin already be 45% long term target. Although I think this was driven by catch up fees and transactions that transaction fees.
Starting 'twenty whore Angelo Gordon initially will weigh on the margin.
But this will reverse as you realized cost synergies. So as you pull this together it's into your 40% 2024, and 45% long term targets too conservative or is this also implying a healthy level of investing.
Thanks, Craig for the question.
We think it's the right target for us to be articulating at this point I think you mentioned some of the key drivers there.
Fourth quarter margins as I mentioned in my comments were elevated by the catch up fees. They also benefited from above expected.
Core fundraising.
But also strong transaction fees. So some of those will not not not reoccur in 2020 for I think about the fund raising waves. We're in the middle of over a longer arc right. We just completed the large flagship private equity fund raises those ads natural elevated catch up fees towards the end of them.
Now we are entering the market with some big new flagships like the new private equity fund and climate the infrastructure fund and climate the new growth fund those will likely complete in 2025 as you get towards the end of campaigns Youll.
Youll see some more catch up fees kick in in 'twenty five in connection with those funds. So when you.
On your cost synergy point.
We mentioned at the analyst day that we had achieved $9 million of cost synergies. We've also said consistently that this transaction is much more about growth.
Diversification and investing and growing our platform over the years and not really about drop in cost synergies to the bottom line.
We are finding additional cost synergies above the $9 million our intention is to reinvest those in long term growth.
So when we take all that into account, we think that the margins. We are targeting for this year are appropriate and longer term.
We certainly will be scaling our businesses and generating operating leverage.
Thanks Jack.
Okay.
The next question comes from Mike Brown with K B W.
Great Good morning.
I wanted to start with the insurance opportunity I guess, it's been a few months since you closed the Angelo Gordon just wanted to see if there was any update on the opportunities there in terms of the opportunity you've been looking at some strategic.
Strategic partners and then when you.
Think about the broader platform now.
Scott whole diversification across a lot of a lot of the major product lines, but is there any elements of the credit business that you think you want to continue to bolster and build out to really fully service the insurance balance sheet. Thank you.
Sure.
Yes, it's a good question because it's very it's very much.
Something that we're focused on and we've been focused on let me just say that the just reiterate that the insurance opportunity I think is both sort of there is two categories of opportunity. One is we currently have a.
A number of insurance companies that are clients of ours.
Across a range of our products. So think of think of the insurance sector is also.
A source of LP.
Penetration and in that exists year to date on both sides of the firm both across all of our strategies and I think with the.
With the expansion of our general product capabilities I think we are able to have a dialogue with insurance companies, that's a bit more holistic and we're already seeing the benefits of that and we have a dedicated team covering the insurance sector.
As as Lps with the embedded knowledge of whats important to insurance companies in terms of.
Their asset selection process. So that I would say is one part of it that continues to grow and continues to be a great opportunity for us.
And it's also it's also a global opportunity.
Secondly on the strategic side.
Obviously, we've talked about this before with our expansion.
Into across across the range of asset classes.
The opportunity to have a more strategic dialogue with a number of insurance companies.
Announcement of the acquisition of Angelo Gordon that dialogue has picked up quite meaningfully.
And so we're doing a lot of work on it I would say we're evaluating opportunities.
And of course.
It will be we'll be very selective and careful in terms of what we ultimately do so that we position ourselves in the most strategic way we can.
And as.
As far as far as the product lines, particularly on the credit side.
We feel we feel great about the.
The mix of product capability that we have an AGM in one of the things that attracted us to Angelo Gordon was that if it was a multi strategy platform. It wasn't a model line that for instance was only doing direct lending.
As a multi strategy platform. So it had a direct lending capability. It has a crew.
Credit solutions capability.
And it has a structured credit capability and in particular I would say one of the things that is very important in the.
The process of managing assets on behalf of insurance companies.
Is making sure that you have product structuring capabilities.
Whether it's whether it's a.
Creating rated note structures risk <unk>.
And asset sourcing capabilities outside of just pure essentially EBITDA risk outside of purely the corporate side, you've got to also be able to reach and sourced and source product on the non EBITDA side. So our structured credit business in terms of asset based finance specialty finance.
Securitized mortgage product.
Across the whole range of those products, we have a.
We have a business that's been built out over the last 15 years that as infrastructure servicing capability.
And product breadth so.
Now.
We'll never be done building those businesses will continue to build those businesses and expand them as the as you know as we are able to scale them with respect to more capital, but we feel pretty good about the tools that we have so.
That's.
That's how we that's how we feel we're positioned right now.
The next question comes from Brian Mckenna with citizens JMP.
Great. Thank so performance in rise climate.
Pretty impressive today with an IRR of 27%.
It will be great just to get some color on really what's driving this outperformance and then with the next rise climate and infrastructure funds coming down the Pike, where what are your initial base case expectations for performance for these strategies.
Jim I think.
You're on.
Sure. Thanks for the questions and ingredients from Geneva, where.
And then about the 10th city of the rise climate launch, so well positioned to answer those questions.
I'd say the outperformance last year was really a.
Being in the right place ahead of the wave.
Started the de Carbonization investment journey, almost seven years ago.
And as a result I think.
We put ourselves in a position to.
Lead the market in terms of deployment and opportunity creation.
Last year I think the value creation for the fund was up 37%, which is obviously a standout in private equity, but in particular, we were able to execute two very important ipos in a market where ipos were.
Certainly rare and that's because I think that the public market is ready for the next generation of climate forward companies. So.
This fund is.
Upon that so far in a world where a little has happened as expected in private equity and invested in exactly the three years that we told the market to be invested in.
20, plus companies well diversified and so far the performance I think as you pointed out there has been strong.
Going forward, we continue to think we're well positioned to show the market differentiated opportunities and we should be able to continue to generate the private equity target returns.
We've been focused on in this fund.
In the infrastructure World I think you continue to see a fair amount of interest and de carbonization and our position essentially expanding from private equity into the infrastructure adjacency offers I think that's significant.
<unk>.
For us.
So this is a period of time that investors are looking for sector differentiation.
In a good position to continue to offer and lives climate.
In terms of fund raising targets for the business, if that's what you're referring to we did say publicly.
When the.
Commitment was announced.
We were targeting.
At least $10 billion across our next <unk>.
Equity fund Trc, two combined with the global South initiative. So those numbers do not include the infrastructure business.
That won't all be raised this year it'll be raised over this year and next year.
And assume that those funds will be activated more towards the end of the year.
Great. Thanks, Jack.
The next question comes from Luke Nathan with BNP Paribas.
Great. Thanks for taking my question just on the transaction fees. It talks about pipeline is picking up that Q1 seasonally weak.
When you integrate in AG that so I'm just wondering how we should think about the potential growth and kind of capital markets transaction fee revenue in the coming years, if we issue more benign Marcus Thank you.
Hey, good question Luke.
If you separate that into kind of a.
The legacy of TPG businesses in the capital markets business. We are building here and then think about adding capital markets fees through the integration of AG, particularly on the credit side.
What we've said historically is we think of a normal run rate for that TPG capital markets business.
At today's level to be around $100 million.
So on a quarterly basis 55 is high relative to that.
The normal run rate now that's going to be growing over time as we grow our businesses and then you layer on top of that.
Opportunities from a G, which we're in the early innings of developing.
So I would I would think of the AG contribution growing during the course of the year this year.
And then the TPG side stepping down to a below normal level in Q1, because the seasonally light number of deals closing in Q1, so the TPG side back loaded in the AG side also kind of feathering in during the course of the year and growing during that during the course of the year. So much like this year.
You saw our capital markets revenue line start low and grow toward the back of the year I'd expect the same kind of.
Pattern this year.
Great. That's helpful. Thank you.
Thanks.
Sure.
The next question comes from Bill Katz with TD Cowen.
Okay. Thank you very much for taking the question. This morning, just want to pick up on that last question as you think about the opportunity set for the capital markets platform within the Angelo Gordon with Apollo B, a reasonable directional view and then how much of that assumption is embedded in the 45% long term FRE margin.
Thank you.
Yeah. Good question.
I think I think the Apollo is doing is a decent.
Kind of directional proxy for the opportunity set I would say we're pretty early in.
And kind of underwriting that opportunity for ourselves. So we're not ready to put a target number out there.
But the longer term FRE margin of 45%.
I would say only incorporates a piece of that opportunity.
That's it from me thank you.
Okay. Thanks.
The next question comes from Brian Bedell with Deutsche Bank.
Great. Thanks, good morning folks.
Hey, Matt a question for al.
Answered.
But maybe just some perspective on the timing of.
The deployment.
Hey, you outlined on slide 18.
In terms of the 132 million and thanks for the color on breaking.
Segmenting that.
132.
Just if you can.
Give us some color on how you think.
That might be deployed over the course of this year is it.
Are we in a situation, where we're likely to see that.
132, you'd be reflected mostly by year end or is it much more dependent on.
Credit conditions with an AG.
Well I would say.
As I said, a few minutes ago. Most of that 132 is associated with capital not yet deployed not the natural step up of capital already deployed on fees, the step up structures funds or separate structures.
So just thinking about your question real time that capital underlying the capital not yet deployed probably has just taken a taken a kind of swag at a three year deployment pace to it on average across those funds.
So if I had to take a guess I'd say that would that would kind of feathering in over about a three year period.
Okay.
Great. Thank you.
Thanks.
The next question comes from Adam Beatty with UBS.
Alright, Thank you and good morning, I just wanted to ask about performance within the credit portfolio I appreciate the earlier comments around.
I think it was either equity or firm wide, 20% revenue growth with stable margins.
But there is some concern these days around middle market credit. Despite the growth there, obviously AG credit performance was quite good.
I know there is pretty intense monitoring and tight docs around that so just wondering any any detail you could share about.
How those companies are performing whether or not theres been equity backstops or what have you. Thanks very much.
Yes, Joe will touch on that in a second but I just sorry, I just wanted to finish that last question. Bryan asked the 132, so I don't want to leave the impression that that's like a onetime opportunity that comes in over a three year period as as that capital is deployed we're obviously raising a lot more credit capital as we've talked about so the $10 billion of credit capital plus that we expect to raise this year.
We'll all come in with no fees yet.
Whatever fee rate you want to assume across our credit business. I mean, we've provided some detail there so that 132 of fee opportunity should be growing over time as we're realizing what's in what's embedded today.
Just to pick up on the question on in terms of credit quality and what's happening in the portfolio I think that.
As I mentioned or alluded to performance has been across our credit strategies has been very very good.
And just to give you some.
Maybe a little bit more color on some data on it if you look at our direct lending business through Twinbrook.
We're by the way our pipeline is up reasonably meaningfully this year based upon transaction activity that we're seeing.
We're also seeing generally.
A quality uptrend in just in terms of the opportunities that we're seeing.
But if you look at the.
The performance of the business over the course of last year, we had no credit losses in the business.
And the.
The performance of the portfolio, which generally reflective I think of what was happening overall within.
Our private equity portfolio is remember that twinbrook businesses vary sector focused.
And so across things like business services and healthcare within their portfolio.
Formats, and and so I think on that at least from at least in terms of <unk>.
Selection criteria, what we do we obviously have a very.
A very selective process of how we're underwriting we also.
Our underwriting in that business with.
Lower leverage on average as a result of the lower middle market nature of it as well as covenant protections across our portfolio, which which obviously allows us to get back to the table and work with sponsors to the extent that we need to but.
Portfolio was very strong overall and I would say the outlook in terms of the pipeline continues to be on an uptrend in terms of quality generally and credit solutions. If you look across our business.
I think I said in my comments that our performance was very strong.
In excess of 300 basis point premium over where the indices ended up.
I think Jack alluded to the fact that there was a strong rally in credit spreads at the end of the year that obviously had a significant impact on the portfolio.
And generally what we've done is where we see.
A.
A change in valuation like that and return to historical tight spreads we've been generally net sellers of the public credit opportunity as a result of that so we've been liquid.
Liquidating a number of positions across our credit solutions book, and we've essentially pivoted our focus from public opportunities because of the tightness of the market to really more private opportunities more bespoke private opportunities, which are a combination of.
Structuring private credit opportunities as well as rescue finance opportunities.
And the opportunity set there in front of US is very very substantial and very large if you look at.
The structure of the market there's over a trillion dollars of single B rated a triple C rated capital structures that are essentially coming due over the course of the next several years.
If you look at the market right now about almost half of the leveraged loan market.
<unk> has less than two times interest coverage, which is true.
It's probably more typically like 20% of the market historically has less than two times interest coverage. So.
With those with that structural dynamic.
Enforced in the market right now it's going to create a lot of very interesting private opportunities for us to execute on in there we're able to use.
We're able to use our sector knowledge and our industry knowledge across both our credit business as well as our private equity business in order to.
Underwrite those credits and value of this company so we feel like that.
The dynamics in terms of the way that setting up is.
Is very is very positive for us and then lastly on the structured credit side.
<unk>.
The biggest thing here is.
What's going on with respect for the need for capital.
And when you look at the community and regional Bank stresses.
That are going on in the market and continuing to go on in the market.
We think we're very early in terms of that dynamic playing out it's kind of a second or third inning dynamic with respect to regional bank deleveraging and we're going to continue to see that that stress drive asset sales and credit risk transfer and I think overall, we're also seeing an opportunity to upgrade the quality.
Of the Counterparties that we're working with looking for that risk transfer.
And on average I would say non EBITDA credit has not participated in the rally that corporate credit has participated in so in terms of relative value, we see a lot of interesting opportunities there. So.
And there've been a number of.
Situations recently for instance, we just purchased.
Our portfolio of $600 million portfolio consumer secured loans from our community Bank.
With really attractive return characteristics to it so.
Portfolio is in great shape, and the opportunity set is even better.
So.
That hopefully that gives you some guidance.
And how we're positioned.
Very helpful. Thank you John.
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. Thank you. Thank you all for joining us if you have any follow up questions. Please feel free to circle up with the Investor Relations team otherwise, we'll look forward to talking to you again next quarter.
Thanks, everyone. Thank you.
This concludes today's Tpg's fourth quarter, and full year 2023 earnings call and webcast.
You may now disconnect. Your line at this time and have a wonderful day.
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