TPG Capital, the buyout firm that invested in soured megadeals including TXU Corp., plans to start raising money this month for a flagship fund that’s seeking as much as $12 billion, said two investors.
The total amount for TPG’s seventh buyout pool would include $2 billion the firm already obtained for a bridge fund, according to the people, who asked not to be identified because the information is private. The predecessor fund raised $19.8 billion in 2008, just before the bankruptcy of Lehman Brothers Holdings Inc. triggered a global financial meltdown. TPG gathered $15.4 billion for its fifth fund in 2006 at the peak of the buyout boom.
Fort Worth, Texas-based TPG, which controls more than $59 billion in buyout, credit and real estate assets, is the last of the six biggest U.S. leveraged-buyout houses to raise a new general vehicle since the crisis, which battered returns from some of the biggest deals in the industry’s history. The funds gathered by Carlyle Group LP, KKR & Co., Blackstone Group LP and Bain Capital LLC fell short of the $10 billion to $22 billion the same firms garnered previously. Only Apollo Global Management LLC, whose 2008 fund has outperformed rivals, corralled more than before.
TPG, co-founded by billionaire David Bonderman in 1992 as Texas Pacific Group, bears more weight of boom-era megadeals gone bad than its peers. The 2006 fund backed two of the largest: 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 has been hobbled by a decline in key gambling markets.
In its final megadeal, a March 2008 bailout of savings bank Washington Mutual Inc., $1.35 billion from TPG’s 2006 and 2008 funds was erased when the government seized the company the same year.
Private-equity firms pool money from investors including pension plans and endowments with a mandate to buy companies over a five- to six-year span, sell them and return the funds with a profit in a cycle lasting about 10 years. The firms use debt to finance the deals and amplify returns, typically keeping 20 percent of the investment gains as a carried interest.
Buyout firms are currently raising the most capital since 2008 as institutions, including pension funds, that have benefited from a rising stock market and robust distributions seek to commit more to private equity.
Among the biggest firms, Blackstone, KKR, Carlyle and Apollo have all gone public in the past seven years, creating a way for the aging founders to cash out and distribute equity in their companies to potential successors. Bonderman, who is 71, in February said he hasn’t ruled out an initial public offering for TPG. Like its publicly traded peers, TPG has ramped up efforts to diversify beyond buyouts, which appeals to shareholders seeking a steady stream of earnings.
TPG this year raised a $3.2 billion credit fund, after initially targeting $2.65 billion, according to data compiled by Bloomberg.
TPG’s buyout results have improved since the Washington Mutual debacle, helped by a surge in asset values that enabled it to harvest gains on successful deals and a retooled investment approach, said the investors, who asked not to be identified because the information is private. As of mid-2014, the 2006 fund was valued at 1.4 times cost and TPG was telling investors to expect a final return of about 1.7 times, the people said. The firm has returned about $12.4 billion to clients since the end of 2012, they said.
The 2008 fund has fared better. It was valued at about 1.6 times cost and could ultimately make back more than two times cost, according to the investors. 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.
The 2008 fund in April backed a $750 million debt investment in yogurt maker Chobani Inc., invested $600 million in Danish online trader Saxo Bank A/S in 2011 and led a $3 billion takeover of clothing retailer J. Crew Group Inc.
A TPG spokesman declined to comment on the fundraising and TPG’s performance.
Three of TPG’s previous four funds returned from 1.8 to 3.2 times investors’ money, according to the Oregon Investment Council, which manages that state’s employees’ pensions and is a long-time TPG investor. All three, Oregon said, delivered returns in the top 25 percent of buyout funds raised the same year. TPG’s first four funds had an average net internal rate of return of 22.3 percent.
Bonderman and James Coulter, 54, a TPG co-founder and fellow billionaire, laid out their sales pitch for the new fund at a Jan. 29 meeting with Oregon officials. The two were there to persuade Oregon to commit $700 million to a $2 billion bridge fund to tide the firm over until it began marketing the new vehicle.
Coulter spotlighted the 2008 fund’s gains as proof TPG has successfully altered course after its ill-fated detour into super-sized deals.
“What we are best at is taking mid-sized companies and changing them,” Coulter said at the meeting. “We have really returned to those roots, focused on those roots the last five years. This is not something we are going to do going forward. This has been our traditional strategy over time.”
After risking large sums in the 2006 fund, TPG cut its average equity contribution to deals in the aftermath of the Washington Mutual investment to around $300 million, in keeping with past practice, Coulter and Bonderman said.
“That will be the sweet spot,” Bonderman said.
The pitch convinced Oregon. After debating whether TPG had learned from its mistakes, officials pledged $700 million to TPG’s bridge fund, the state’s second-largest commitment to a TPG vehicle. The firm later landed $600 million from the Washington State Investment Board and reached its $2 billion target.
The $2 billion, which TPG has not tapped, will be rolled into the fund TPG is raising.