TPG Said to Seek Oregon Partnership as Fundraising Looms

TPG Co-Founder Jim Coulter
For the past year, TPG’s co-founder Jim Coulter has been personally meeting with officials from pensions, including those at New York City’s retirement system, to pitch the deal. Photographer: Qilai Shen/Bloomberg

TPG Capital, trailing rivals that struck partnerships with large U.S. public pension funds, is seeking to secure its own big-ticket investor, according to two people with knowledge of the matter.

For the past year, TPG co-founder Jim Coulter has been meeting with officials from pensions to win a large backer for a separate account, said one of the people, who asked not to be identified because the talks are private. The firm has talked to the Oregon Investment Council about such a deal, though an agreement isn’t certain, said the people.

TPG, which plans to start raising its next buyout fund in 12 to 18 months, is seeking to join other buyout firms in securing more permanent capital from a large backer as buyout funds are shrinking for the first time in the industry’s history. Blackstone Group LP, Carlyle Group LP, KKR & Co. and Apollo Global Management LLC have all paired up with at least one major U.S. pension, drawing commitments as large as $3 billion. In such deals, investors write big checks and back multiple strategies at one firm in exchange for better terms such as lower fees.

“Ideally, it’s a way for firms to get permanent capital, and a lot better than having to raise it all the time,” said Michael Forestner, who helps advise large institutions at New York-based Mercer LLC. “Managers realize that pensions will ask for special terms and fee breaks anyway, why not get something out of it?”

Courting Pensions

Fort Worth, Texas-based TPG would use the money from a future partner to invest in opportunities outside of its existing funds, according to one of the people. TPG, known for investments in companies such as Burger King and J. Crew Group Inc., has about $51.5 billion under management, according to its website.

Michael Mueller, the interim chief investment officer at the Oregon pension, declined to comment on whether the pension has discussed a separate account with TPG. The fund is regularly in talks with firms over potential investments, he said.

Owen Blicksilver, a spokesman for TPG declined to comment.

TPG’s 2008 fund hadn’t produced a profit for investors as of March 31, according to data from the Oregon pension fund. That fund and its 2006 predecessor, whose holdings are valued below cost, are suffering from a 2008 investment in failed lender Washington Mutual Inc. In total, TPG’s funds lost about $1.3 billion when the bank was bailed out that same year at the peak of the credit crisis.

Funds Shrink

Among TPG’s top-performing funds is the pool it raised in 2000, which has produced a 2.45 times return on invested capital, according to data from Oregon.

Separately managed accounts are reshaping the model for the biggest private-equity firms, which traditionally pooled money into funds with the same terms for multiple investors, such as a 2 percent management fee and as much as 20 percent in a share of profits known as carried interest.

Those funds are shrinking for the first time as investors have become more selective about which firms to back since the 2008 financial crisis. There is also more competition for a smaller pool of investor money, with 1,872 private-equity firms collectively seeking $801 billion from investors, according to data from London-based Preqin.

KKR is seeking $10 billion for its newest flagship fund, 43 percent less than it raised for its predecessor. Blackstone has finished raising its latest buyout fund at $16.2 billion, a fifth smaller than the prior fund.

Investor Caution

Separately managed accounts can allow private-equity firms to deploy investors’ capital into deals outside existing funds. Joncarlo Mark, formerly a senior portfolio manager at California Public Employees’ Retirement System, said investors should be aware of potential risks.

“Typically, investment mandates in big buyout funds are broad enough that managers can invest in almost anything,” said Mark, founder of advisory firm Upwelling Capital Group in Sacramento, California. “Since there’s a lot of flexibility already, investors should be cautious about whether separate account money goes toward investments that are consistent with their risk-adjusted return expectations. One bad deal could eat all the fee savings of the separate account.”

Calpers, the largest U.S. public pension plan, pioneered the model of special partnerships with managers a decade ago. The earliest of these deals resulted in Calpers owning a stake in the managers themselves. By 2008, Calpers had amassed ownership shares in Silver Lake Partners, Apollo and Carlyle.

‘Tremendous Benefit’

After getting the account from Calpers in 2008, Silver Lake co-founder Glenn Hutchins said the arrangement provided “tremendous benefit to Silver Lake and our limited partners by bringing important long-term funding.”

Last year, TPG sold stakes of its management company to Asian and Middle Eastern investors in separate transactions.

Public pensions, struggling to achieve the 7 percent or 8 percent annual return on investment necessary to meet future liabilities as bond yields have shrunk to historic lows, are agreeing to the deals in hopes of meeting their return thresholds.

Apollo’s Leon Black and KKR’s George Roberts earlier this year told Texas’s largest public pension it can meet an 8 percent annual return target by investing in distressed European assets and commodities. Texas Teacher Retirement System agreed in November to invest $3 billion each with Apollo and KKR in separately managed accounts.

Early Backer

Oregon has backed TPG since its first fund in 1994, investing outside the firm’s mega-buyout strategy as the firm diversified. When TPG started a business dedicated to smaller deals, Oregon committed money to the venture.

Apart from smaller deals, TPG has raised capital for other strategies outside traditional buyouts, such as pools that focus on credit-related investments, lending to mid-sized companies and growth equity. The firm is also seeking to expand into areas such as energy and real estate.

David Bonderman, 69, and Coulter, 52, founded TPG in 1992 after working for the Bass family together. Shortly after setting out on their own, the two led a leveraged buyout of Continental Airlines in 1993. The transaction netted investors more than 10 times their money. TPG has about 278 employees in 14 offices around the world.

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