TPG Lures Investors to $10 Billion Fund With Discounts

TPG Capital is offering investors discounts on management fees as it tries to raise a $10 billion buyout fund after investing in soured deals including TXU Corp. and Washington Mutual Inc.

Investors that commit to TPG Partners VII LP could get as much as a 25 percent reduction on fees, depending on the amount committed and whether they participate in the first round of capital raising, according to an offering document obtained by Bloomberg News.

TPG Capital, which controls more than $59 billion in buyout, credit and real estate assets, is dangling the incentives after disappointing returns from deals made during the buyout boom and financial crisis cast a shadow over more than two decades of investment success. The move follows rivals including Apollo Global Management LLC, Carlyle Group LP, KKR & Co. and Warburg Pincus LLC that offered similar breaks on recent funds.

Investors pushed for reduced management fees during the crisis to bring alignment of interest back into balance, said Kelly DePonte, a managing director at Probitas Partners, a firm that helps private-equity firms raise money. Some firms also gave breaks “to get reluctant LPs back to the table and generate fundraising momentum necessary to catch attention in crowded markets,” he said.

TPG spokesman Owen Blicksilver of Blicksilver Public Relations declined to comment on fundraising and the fee structure.

Latest Fund

Co-founded by billionaire David Bonderman in 1992 as Texas Pacific Group, TPG is seeking $10 billion for its latest pool, which includes $2 billion obtained from large investors such as Oregon Investment Council and Washington State Investment Board. The last fund raised $19.8 billion in 2008, just before the bankruptcy of Lehman Brothers Holdings Inc. caused a global financial meltdown.

TPG has told investors that it plans to avoid mega deals after experiencing losses during the crisis. Since 2009, the firm has made an average investment of $306 million and hasn’t participated in a consortium, or a takeover done by a group of buyout firms, the marketing document shows.

To entice big checks, the Fort Worth, Texas-based firm is offering 5, 10 and 15 percent discounts on commitments of at least $100 million, $250 million and $400 million respectively, according to the document. It will give an extra 10 percent discount to investors that commit to the first round of capital raising. An investor could be charged around 1.1 percent annually on committed capital, less than the standard 1.5 percent fee structure.


The firm is also offering investors the choice of a 1.5 percent management fee during the investment period, or a structure that reduces the drag fees have on performance early in the fund’s life, known as the J-Curve, the document shows.

TPG, which will commit as much as $400 million to the fund, will take 20 percent of the profit, known as carried interest, according to the document.

Other buyout firms have adopted similar fee breaks. Carlyle is charging investors that committed as much as $500 million to its $13 billion fund a discounted fee of 1.1 percent. Apollo proposed cutting the management fee on its $18.4 billion fund by 10 basis points a year for commitments of $250 million and by 20 basis points for $500 million.

Winning Ways

TPG is seeking to convince investors it’s returning to winning ways after backing two of the biggest money-losing deals of the boom era: a $48 billion buyout of Texas utility TXU, now Energy Future Holdings Corp., in which KKR and Goldman Sachs Group Inc. also invested; and the $30.9 billion purchase of casino operator Harrah’s Entertainment Inc., now Caesars Entertainment Corp., which Apollo co-led.

A slump in natural gas prices, to which Energy Future’s revenues are tied, stands to wipe out TPG’s $1.5 billion investment in the utility, which filed for bankruptcy protection in April. Caesars, which has been hobbled by a decline in key gambling markets, has had only one profitable year since 2008. It was valued at a 0.6 times multiple with negative 12 percent IRR, according to the document.

In its final megadeal, a March 2008 bailout of savings bank Washington Mutual, $1.35 billion mostly from TPG’s 2006 and 2008 funds was erased when the government seized the company the same year.

Results Improved

TPG’s buyout results have improved since the Washington Mutual collapse, helped by a surge in asset values that enabled it to harvest gains on successful deals.

As of June 30, according to the marketing document, the 2006 fund was valued at 1.4 times cost and had an average annual internal rate of return, or IRR, after fees of 5 percent. TPG has said it expects the fund ultimately to deliver a multiple of 1.7 times cost, two investors familiar with the matter said this month.

North American buyout funds of at least $4.5 billion in size raised in 2006 posted a 6.8 percent median net IRR, according to data provider Preqin Ltd. The median return for North American funds of all sizes was 8.7 percent.

The 2008 fund was valued at about 1.6 times cost and could ultimately make back more than two times cost, according to the investors. TPG estimated the fund’s net IRR at 12 percent.

That compares with a 10 percent median IRR for large North American funds and 15.7 percent for all North American funds raised that year, London-based Preqin said.

Successfully Retooled

In meetings with investors, Bonderman and TPG co-founder James Coulter have spotlighted the 2008 fund’s results as proof that TPG has successfully retooled its investment strategy after its ill-fated move into super-sized deals with the 2006 fund.

“What we are best at is taking mid-sized companies and changing them. We have really returned to those roots,” Coulter said at an investor meeting in January.

Initial public offerings and sales of holdings including health-care information supplier IMS Health Holdings Inc., Australian hospital operator Healthscope Ltd. and refinery operator Northern Tier Energy LLC have lifted the fund’s results.

TPG valued the fund’s IMS stake at $2.3 billion, or 3.1 times its 2010 investment, while Northern Tier delivered nearly a nine-fold return on $98 million invested that year. The value of $621 million investment in 2011 in homebuilder Taylor Morrison Home Corp. has climbed to $1.4 billion, according to the document.

The fund’s 2009 investment in a group of distressed-debt and special-situations deals has risen in value to $1.6 billion from $736 million, the document said.

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