Private equity group TPG (NASDAQ: TPG) went public via IPO on January 13. Opening 12% above IPO price, it achieved a $10bn valuation. TPG's public debut is widely considered the first 'big' IPO of the year. Underwriters of the deal include JPMorgan, Goldman Sachs and Morgan Stanley. In total, 23 investment banks worked on the IPO.
What is TPG Inc?
TPG operates as a global, diversified alternative asset management firm. The Texas-based company was founded by billionaire investors David Bonderman and Jim Coulter. For clients, it offers an array of investment opportunities in the private markets, public markets, impact funds, real estate, and alternative investments.
In its pre-IPO prospectus, TPG laid out six key metrics to give prospective investors a snapshot of the company:
| Assets Under Management: | $109bn |
| Active Portfolio Companies: | 280+ |
| Countries – Portfolio Company HQ: | 30+ |
| Employees: | 912 |
| Investment & Operations Professionals: | 320+ |
| Median TPG Tenure of Product Leaders: | 15 years |
TPG owns significant stakes in Spotify, talent and sports agency CAA, and Vice Media. Some of its historically notable investments include Airbnb, Astound Broadband, Lynda.com and Burger King.
How does TPG make money?
TPG primarily derives revenues from management fees, performance allocations, investment income, broker-dealer compensation and expense reimbursements.
Private equity firms like TPG make money by raising funds from institutional investors. TPG has forged partnerships with over 500 such investors. These include pension funds, insurance companies, family offices and sovereign wealth funds. TPG then uses the funds it raises to invest in private businesses, which it grows with the view to sell for a profit.
TPG's management fees are based on the amount of capital committed by an institutional investor.
TPG's asset management business is diversified across five areas: Capital, Growth, Impact, Real Estate and Market Solutions. Within each of these, it operates various funds. The company has been running for 30 years and displays strong historical growth.
Of its 500 institutional limited partners, 76% are invested in active funds across three or more of the company's products and 84% are invested in active funds across two or more of its platforms.
Assets under management have grown 81% from 2016 to $109.1bn as of September 30, 2021. From its fiscal year 2018 to the end of September 2021, the company grew its net income by 599% to $5bn.
TPG receives a monetary performance allocation dependent on how well its funds perform. It also generates income on its own investments as a general partner.
TPG's growth prospects
Pitched as the new Blackstone, TPG is ambitious and confident in its ability to grow rapidly. It plans to expand its existing suite of offerings, launch new products and platforms and pursue inorganic growth opportunities to compound growth in the coming years.
“We believe that our firm’s earnings stand to benefit from substantial margin enhancement as our platforms continue to grow and mature.”
Indeed, TPG is directly linked with around 500 institutional partners, keeping it abreast of industry news and strategic investment opportunities. The company sees significant room for growth both with existing investors and new investors.
With a market cap of $10bn and 306.9m shares, outstanding TPG ranks fifth-most-valuable private equity firm in the United States. It also ranks fifth for assets under management.
| Private Equity Firm | Market Capitalization | AUM |
|---|---|---|
| Blackstone | $144bn | $619bn |
| KKR | $61bn | $252bn |
| Apollo | $41bn | $481bn |
| Carlyle Group | $18.7bn | $256bn |
| TPG Inc | $10bn | $109bn |
TPG claims to distinguish itself from its peers with its collaborative investment approach, centralized resources, and partnership engagement all while cultivating an entrepreneurial culture. TPG has a long-established in-house operations group comprised of 53 professionals each with specialized sector knowledge and experience.
Many of its peers outsource their operations, and TPG believes keeping this in-house gives it a competitive edge.
An example of a recent product launch is TPG Rise Climate, which launched in 2021. This dedicated impact fund had raised $6bn by the end of September. It invests in companies developing innovative climate solutions and helps them scale.
TPG may not be the only private equity firm to go public this year. Rumor has it that CVC Capital Partners is also considering an IPO in 2022. The asset manager with around $122bn AUM could potentially launch with a valuation exceeding $15bn.
Risks to investing in TPG stock
Some of TPG's recent success could be put down to the stars aligning at an opportune moment. For instance, low-interest rates, bargain M&A opportunities and an explosion in SPACs.
SPAC-combined IPOs were a driving force in presenting new money-spinning opportunities to institutional investors. TPG has taken part in some of these but post-SPAC IPOs have underperformed benchmark equity indices leaving investors disappointed.
The concern going forward is that recent success will be hard to replicate or beat if the environment changes.
There are many additional risks to investors when investing in a private equity company. Profitability ultimately comes down to the success of its funds. It needs to attract new capital and invest in promising businesses. Some of its investments are outwith the US in emerging markets, which come with its own set of challenges.
Should TPG perform poorly, raising new capital will be more difficult. There's also the risk excessive redemptions from its public equity funds could snowball into a mass drawdown of funds.
Should you invest in TPG?
TPG's IPO comes hot on the heels of an outstanding year of private equity deal-making in 2021. According to a PitchBook analyst study, 8,624 private equity deals amounting to $1.2tn closed last year. This was up 64% on 2019, a previous record-breaking year.
Private equity buying out businesses in M&A transactions soared in 2021 to $5.6tn worth of transactions. The prior record occurred in 2007 at $4.6tn. And this buyout trend is expected to continue as companies crushed by the pandemic run out of growth options.
TPG aims to build dynamic products and options for its clients while also instituting discipline and operational excellence across the investment strategy and performance of its portfolio.
The company is aggressively targeting growth and social impact investing themes. These have both proved attractive since the pandemic took hold, but interest in growth stocks is waning as investors opt to reduce risk. Nevertheless, social impact investing appears to be full steam ahead as social awareness becomes commonplace.
Of course, low-interest rates and post-pandemic trends have helped private equity thrive, but the risk of interest rate raises could make the landscape more challenging in the months ahead.
Overall, an investment in TPG may prove a less risky move than investing in growth stocks directly. And it's also potentially more appealing than a run-of-the-mill ETF.