Private-Equity Classic TPG Might Still Have Some Fizz

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The firm’s initial public offering will provide investors with a unique type of exposure among its alternative-asset manager peers

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There are many benefits to this kind of diversification, and investors have largely rewarded the expansion in the types of funding and breadth of products at Apollo, Blackstone and others. But it’s also been a great time to be in the private-equity business and could still be for a while, depending on the broader financial conditions.

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A bullish stock market boosts firms’ ability to exit investments, along with performance fees and other benefits. At the same time, it is also a business that earns a very stable income. The share of TPG’s earnings that pertains to fees rather than performance-related gains is higher than peers. According to the initial public offering prospectus, fee-related income accounted for approximately 55% of its pretax distributable earnings during the first three quarters of 2021. Investors tend to value these fee income more than income related to exits.

Of course, the future is also what worries investors. Fees are valuable because they are not directly dependent on the market performance of the investment. But their development should be fueled by fundraising and adding fee-paying properties under management. Exiting the investment and returning the money to the limited partners also means you have to replace those charges. TPG does not yet have the scale of a perpetual-capital vehicle – such as a pool of retail funds or insurance money – that some peers have built up recently. They don’t rely on regular fundraising. So investors may be more skeptical of TPG’s ability to navigate the cycle.

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This could be a negative mark on the valuation of TPG. By the same token, however, it also means that TPG has an opportunity to add permanent capital and that its stock could tackle some of the many expansions of others. Investors can bet not only on TPG’s current business, but also beyond what is implied by its anticipated pace of fundraising and deployment. Similarly, the continued growth of private-equity firms still has a major catalyst ahead of it: inclusion in major indices such as the S&P 500. It is possible that the entire sector will get a boost if one of them is eventually added to the widely followed benchmark. ,

Investors should also note that not all “private equity” strategies are old-school leveraged buyouts. There can be a lot of growth in some areas. TPG has a high exposure to rapidly growing environmental, social and governance, or ESG, investments through its IMPACT platform. Impact represented approximately 12% of total assets under management as of the third quarter. This also applies to growth-style private equity, which often involves backing young companies like Airbnb. TPG’s growth platform represents about 20% of AUM. Exposure to those areas may be attractive to some investors.

There are broader questions for the private-equity industry, including how rising rates and a less accommodating Federal Reserve exit could impact that. At the same time, market volatility also creates long-term opportunities that can fuel fundraising efforts. Investors looking to get on that ride may consider TPG as a good vehicle.

Write Telis Demo at [email protected]

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