TPG Capital said to seek $12 billion for new investment fund

08/04/2014 10:30 AM

08/04/2014 10:31 AM

TPG Capital, the buyout firm that invested in soured megadeals including the now-bankrupt Energy Future Holdings, 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 triggered a global financial meltdown. TPG gathered $15.4 billion for its fifth fund in 2006 at the peak of the buyout boom.

TPG, based in Fort Worth and San Francisco, controls more than $59 billion in buyout, credit and real estate assets and is the last of the six biggest U.S. leveraged-buyout houses to raise a new investment pool since the crisis. The funds gathered by Carlyle Group, KKR, Blackstone Group and Bain Capital fell short of the $10 billion to $22 billion the same firms garnered previously. Only Apollo Global Management, 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 Dallas-based TXU Corp., now Energy Future Holdings, in which KKR and Goldman Sachs Group also invested; and the $30.9 billion purchase of casino operator Harrah’s Entertainment, now Caesars Entertainment, which Apollo co-led.

A slump in natural gas prices, to which EFH’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, $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.

Going public

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. A record 2,176 private-equity funds are seeking $739 billion, up from 2,098 funds gathering $733 billion at the beginning of the year, according to data by London-based research provider Preqin Ltd.

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, said in February that 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.

Smaller deals

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, Australian hospital operator Healthscope Ltd. and refinery operator Northern Tier Energy have lifted the fund’s results.

TPG spokesman Owen Blicksilver of Blicksilver Public Relations declined to comment on the fundraising and TPG’s performance.

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 Investment Council 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.

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