Bonderman’s IPO Prospects Dim Even as Carlyle Chases Apollo to Public Exit

The lure of an initial public offering has proved irresistible to the biggest buyout firms, with Carlyle Group now lining up to follow KKR & Co. and Blackstone Group LP to the IPO market. For TPG Capital, the prospect of cashing in on a stock offering still looks remote.

Four of the six largest U.S. independent buyout firms will be publicly held once Carlyle completes its sale. Fort Worth, Texas-based TPG, which has raised more for buyouts than any other private-equity firm in the past 10 years, according to Preqin Ltd., has so far balked at going public. Bain Capital LLC, ranked No. 5, is also closely held.

TPG relies mostly on buyouts for revenue, a deterrent for stock investors who demand more diverse income streams. The firm closed its largest fund in 2008, after most of its competitors raised pools of a similar size. That means TPG has had less time to turn around troubled investments and distribute profits to investors, also complicating prospects for an IPO. KKR, meanwhile, has boosted returns on its biggest pool, raised in 2006, and is marketing its next flagship fund.

TPG hasn’t built a firm “that looks like the others --it’s not as diversified and is almost entirely focused on private equity,” said Jeremie Le Febvre, global head of origination for Triago, which helps private-equity firms raise money. TPG’s status as a closely held company may be by design, according to Le Febvre. Co-founders David Bonderman and Jim Coulter “prize privacy” that would be lost with an IPO, he said.

TPG Capital co-founder Jim Coulter. Photographer Qilai Shen/Bloomberg Close

TPG Capital co-founder Jim Coulter. Photographer Qilai Shen/Bloomberg

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TPG Capital co-founder Jim Coulter. Photographer Qilai Shen/Bloomberg

Average Returns

Recent returns at TPG haven’t matched the firm’s early success. TPG Partners V, raised in 2006, had an average annual loss of 6.3 percent at the end of the first quarter, according to data provided by the Oregon Public Employees Retirement Fund, a long-time investor. Fund VI, raised in 2008, had an average annual loss of 5.9 percent, compared with a negative 0.7 percent annual rate of return for the median fund started that year.

The first fund, in 1994, delivered an average annual return of more than 36 percent, according to Oregon. TPG Partners III, raised in 2000, had a return of 25 percent.

Capital from a public offering can be used to fund new businesses, while the shares can help pay for acquisitions and provide a means of paying off founders or to recruit and retain employees. An IPO is one of the only ways to raise money for those purposes as private equity becomes a less lucrative business.

“The heads of private-equity firms have realized that if they want to be billionaires, then going public is the only way, as management fees and fund sizes are shrinking and earnings in non-public private-equity firms” are falling, Guy Hands, head of private-equity firm Terra Firma Capital Partners, said in an interview.

Carlyle Deal

Carlyle, based in Washington, is poised to file a registration statement within months and has chosen underwriters including JPMorgan Chase & Co. and Citigroup Inc. to lead the offering, according to people familiar with the matter. TPG has discussed an offering and has no plans for a filing, according to a person familiar with the matter who declined to be identified because the discussions were private.

TPG spokesman Owen Blicksilver declined to comment.

Alternative asset managers that resemble buyout firms also are looking to the public market. Oaktree Capital Management LP, the investment firm with more than $80 billion under management that takes control of companies by investing in their distressed debt, is gearing up to sell a stake to the public, securities filings show.

Bain Capital

Bain Capital doesn’t see an immediate need for a public listing because the firm already took steps to manage growth and transition, according to a person close to the firm. That could change if the company decides that the benefits of permanent capital outweigh the reporting requirements and other burdens of being public, said the person, who requested anonymity because the management deliberations are private.

The public markets have been far from enthusiastic about private-equity managers. Of the three firms on the New York Stock Exchange, KKR and New York-based Apollo Global Management LLC lost value from the time they sold stakes to investors through a listing in Amsterdam and a private exchange, respectively. KKR is up 49 percent since it listed shares on the New York Stock Exchange last July.

Blackstone Group LP (BX), the largest private-equity manager, went public in 2007 at the peak of the leveraged-buyout market, allowing co-founder Peter G. Peterson to cash out most of his stake. The stock is trading at about half its IPO price of $31 a share even with a 16 percent gain this year.

Mitt Romney

An IPO can also help companies with succession issues. Senior managers are able to sell their interests at a high valuation to the public while junior partners, who may not have the resources to buy them out, receive ownership in the form of stock or options that vest over time.

Succession is less of a concern at Boston-based Bain, which successfully dealt with transition once before when one of its co-founders, GOP presidential candidate Mitt Romney, left in 1999. At the time, the firm spread ownership across its top partners, resulting in a structure where no single stakeholder receives more than 10 percent of profits.

At TPG, ownership is concentrated in Bonderman’s and Coulter’s stakes even after the firm sold stakes to foreign investors earlier this year, because the two co-founders didn’t sell shares, a person familiar with the matter said.

Such private sales preceded Apollo’s IPO and Carlyle’s decision to register its shares. TPG, in a letter to investors apprising them of the stake sales, noted the tendency of buyout managers to go public, and portrayed their sale as an alternative for now.

Global Expansion

The firm said it plans to use the money from selling private stakes to expand internationally and back new teams for investment strategies outside of TPG’s traditional focus on buying and selling companies.

While extra funding may help TPG keep up with competitors in terms of growth, it doesn’t address how its founders -- both of whom are already billionaires -- may eventually be paid for their stakes.

Bonderman, 68, and Coulter, 51, met more than two decades ago when they invested money for the Bass family in Fort Worth, Texas. The two men struck out on their own to lead a leveraged buyout of Continental Airlines in 1994, and that transaction -- which netted investors more than 10 times their money -- paved the way for what became known as Texas Pacific Group.

TPG, which houses most of its executives in San Francisco, later bought Burger King and J. Crew Corp. It also participated in some of the biggest deals of the LBO boom, including the record-setting purchase of power producer TXU Corp. for $43.2 billion in 2007.

The firm’s ranks have swelled to more than 275 employees in 14 offices worldwide and it’s currently investing a $19 billion fund it finished raising in 2008.

To contact the reporters on this story: Cristina Alesci in New York at calesci2@bloomberg.net; Jason Kelly in New York at jkelly14@bloomberg.net

To contact the editors responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net

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