TPG Inc. (TPG) Earnings Call Transcript & Summary

Great. Well, good morning, and welcome, everybody, for our next session. I'm very excited to welcome Jon Winkelried, CEO of TPG. As many of you know, TPG went public earlier this year, although in the markets like we've had, it feels probably more than a year at this point. But with about $135 billion in assets under management, it is one of the largest global alternative asset managers in our coverage. With deep expertise in private equity, TPG has a long history of growth through product innovation across industries and geographies, with probably one of the most notable recent examples what you guys have done in the client franchise, which I'm sure we'll get to talk to you about later on today. Despite what obviously been a pretty tough market, TPG raised considerable amount of capital with fee paying AUM up over 30% year-to-date, nicely exceeding expectations out of the gate. So we'll spend time on all of the above. So welcome. Really excited to have you here.

Thank you very much. Appreciate it. And it's, as you know, a little homecoming for me, right, coming back to Goldman Sachs. So I appreciate all the support that Goldman Sachs gives us.

Great. Well, so I wanted to kick things off with a little bit of a top of the house view. TPG went public early in the year as we talked about. It's the first time you're presenting at our conference. What would you like our audience to kind of know about TPG and how it's positioned in this environment? And ultimately, what gets you excited about the business as you look forward?

Yes. Well, I think -- look, I think the -- there's a really interesting moment in time that we're going through right now in private markets. And I just -- I started the day by having a number of one-on-one conversations with some of our investors. And one of the things that they kind of -- they pose in the course of the dialogue is there's a lot of talk right now about sort of the overall kind of bear case on private markets and what's going on with this adjustment that we're seeing in markets around the world, contraction of capital available, things like that. The thing that I really wanted to kind of focus people on is that we're going through a really interesting dynamic in the market right now. Certainly, a moment of disruption in terms of valuations in the market, dealing with inflation that we haven't seen in a very long time. If you look over the course of time as to the opportunity for firms like TPG, and in this particular cycle, I think we're particularly interesting, we're particularly well positioned. But if you look at over the course of time in these moments of disruption, these moments have been very important inflection points with respect to the growth in large pools of capital that get deployed in really interesting ways around private markets. And so just look over time, if you look at what happened, going all the way back, as an example, look at what happened during the dot-com period, what was happening then is public markets were substantially disrupted. That was the peak. The late '90s was the peak in the number of public companies, actually publicly listed companies, and some of the great pools of private capital were at that moment in time, we're really, frankly, created around that opportunity, where private capital came in and replaced what was before public market capital and some of the great private equity strategies were born. If you look at the GFC, what happened around the GFC. All of the largest, most interesting pools of, for instance, private credit, direct lending strategies, opportunistic pools of kind of private capital were really created actually out of the GFC. Banking regulation change, capital requirements change. There was a fundamental sea chain -- sea change that occurred at that time. And as a result of that, you've had -- if you look back on that now over the course of a dozen years, what's changed in the market is the provision of capital across credit markets, across lending markets, et cetera, has entirely changed. The thing that's going on now that's really interesting, and I think that when you kind of take a step back and look at what's kind of going to drive opportunity going forward, the phenomenon that's going on right now as a result of geopolitical change, the macro change that's in front of us, probably the one thing that I would focus people on is energy security, energy independence, transition as it relates to climate and what's happening in the -- generally, in terms of the imperative and the need for governments around the world, and private companies around the world to focus on this problem. And this is something that you're seeing now manifested in government policy like the IRA that was passed here. You're seeing it in terms of legislation in Europe. The thing that's a common thread around the world is the amount of capital that will be required to address this issue of energy security, energy transition. TPG, as you know, Alex, because you mentioned it in your opening, has been very focused on this from early on. We were the innovators in the market as it relates to Impact investing. We started with the RISE Fund. A year or so ago, we raised our first climate-focused private equity fund. We raised $7.5 billion in a climate-focused private equity vehicle. Of all the businesses in the firm, if you look at the capital need in the market, the estimates of the capital need in the market to address this issue are somewhere between $3 trillion to $6 trillion a year. Of all the businesses in the firm, if you look at where deployment is actually ahead of pace, it's in climate. And so I think that when you look -- so if you ask me, like, let's roll the clock forward and look at what the world's going to look like 4, 5, 6 years from now and say, what's happened? What's different in private markets than versus what we're looking at today? I think that the amount of capital that will be raised, that will be deployed against this issue and against this problem is probably the single largest opportunity that I've seen -- one of the single largest opportunity that I've seen across my career as it relates to formation of product capital driving really interesting returns. And it happens to be a place where we really have been the market leader. So -- and as we speak right now, when we think about that strategy, we think about that strategy holistically, we have a RISE Impact fund. We have a RISE climate private equity fund. Over time, I think what it will look like is that it will look like a investing complex from probably even early-stage venture all the way through mid-return pools of capital like infrastructure, as an example. You probably already heard about that in terms of the focus on lower cost of capital moving into that space. Credit, as well in terms of funding, the expansion and the build-out of some of these strategies. Usually, these markets start with sort of development capital in terms of whether it is hydrogen technologies, other forms of renewable energy. Usually, it starts with development capital and then evolves to actually the build-out and the scaling of those particular types of strategies. So I think it's one of the great opportunities in front of us. And so when I think about it, I think the 2023 through 2030 period is going to be a big transformation in private markets focused on these challenges.

Great. I'm going to jump around a little bit, but sticking with the climate point that you mentioned. So clearly, tremendous amount of capital needs in the industry, as you highlighted. Is there enough LP demand for something relatively more specific and narrow? And do people think of that in the same contract as they think about broad infrastructure? Do they think of that as private equity? Or do you envision climate really being carved out as almost a separate asset class in a separate vertical when it comes to the private markets?

Well, I would say that when we go around the world and we talk to LPs, I don't think there's a more common subject actually that comes up than people talking about this whole issue. Well, first of all, there's a broader issue around ESG generally. There's a lot of controversy about ESG. But investing in climate strategy is not just -- it's not just ESG, okay? It's really where there are really interesting new businesses and new technologies that are getting created that I think will require the substantial amounts of capital. And I think LPs are -- not only are they interested in it, they're kind of obsessed by it right now in terms of how is this going to play out. And some of them are obsessed about it, frankly, because they actually do have ESG mandates, and so they have to figure out how are they going to express that. Others are obsessed about it because they view it as an incredible place to deploy capital and drive long-term returns. If you look at the dynamic -- and again, this is a global phenomenon. You've got that happening among large U.S. pension funds. You have the large Canadian pools of capital that are focused on it. You have obviously -- even in the Middle East, there's a tremendous amount of dialogue, which is flushed with capital. There's a tremendous amount of dialogue about it there. Asia, it's very top of mind. So I don't view it as a -- just your characterization of that as sort of like a -- I don't think you said this, but basically a more narrow strategy. I don't view it as kind of a more narrow strategy in that sense. I view it as a strategy and an issue that is basically going to cut across many types of pools of capital and many times -- and different return bands across the market. I just see it as the largest need for new capital formation among all of the technologies, among all the industries that we look at. So that's -- yes. That else.

All right. Let's focus on your largest, and probably the more -- the most established business, which is private equity. Over the course of this year, we've seen sort of various data points around whether it's crowded, fundraising market, the denominator effect, cash flow dynamics between realizations and deployments. So that's been sort of discussed over the course of the year. You look at your fundraising, still really strong. You guys are meeting or exceeding your expectations across the current flagship fundraising cycle. So maybe spend a minute on what differentiates TPG and what's been generally a more challenging area to fund raise in kind of traditional private equity?

Well, I think the setup for our whole fundraising program has been that if you go back over the course of the last few years, and I think you know this, but -- because we talked about this when we were on the road for the IPO, we were probably among the large private equity players in the market, the most proactive and the most forward leaning with respect to returning capital. So if you look at the amount of capital we returned relative to the amount of capital we invested going back probably to 2020, the -- as a firm across all of our strategies, we had returned probably something like 1.5x the amount of capital we invested. So we've leaned into that opportunity because we obviously knew valuations were very high. There was a great opportunity to monetize certain assets. So we systematically, across our business, focused on a disciplined way on what assets could we monetize, should we do it at that time and we lean way into that. So we clearly had the highest ratio across the industry. That's really helped us in many ways. One is it obviously helped us in terms of return performance because we were coming off the back of obviously a pretty strong run in terms of economies and growth. That clearly helped us in terms of our LP base appreciating the fact that we were more proactive about returning capital. There were moments in time when there was a debate that some LPs didn't want to actually get the capital back. Most LPs want the capital back at some point. So we returned a lot of capital. Yes. And as a result of that, what's happened is that it's been -- it's helped us from a -- it's differentiated us with respect to the recycling of that capital back to us. As you pointed out, we have been in the market raising a lot of capital the last -- in the last year. So far this year, we raised $26 billion of new capital. Over the last 12 months, we raised over $30 billion of new capital. So in terms of what's happening in the fundraising environment, I think different GPs are experiencing different things. We happen to be, I think, being positively differentiated by the market right now because we have driven really strong returns across all of our strategies, and we have returned a lot of capital. So as a result of that, when we're coming back for the next raise, as opposed to what you're seeing in the market very often, which is we invested this fund very quickly. We haven't returned any capital. We're now back asking for another reload. Our dynamic around that has been different. So as a result of that, I think we've been positively differentiated in the market. Fundraising generally is harder. I'm just telling you, okay? I mean you're probably hearing that fundraising is slower. Fundraising is harder. You're hearing that from everybody in the market. LPs here in the U.S. are over allocated. As a result of that, when you look at the mix in terms of where is the money coming from these days? If you sort of -- if the pie chart in kind of 2020 looked like U.S. being 50% of the capital and international being -- non-U.S. being 50% of the capital, it's probably like 70-30 today in terms of that shift. Places like the Gulf, places like Asia, lot of capital, lot of liquidity, much more forward-leaning than what we're seeing here in the U.S. But I think the backdrop for us is that we set ourselves up well going into it.

Right. So when you look into 2023, these are all the kind of headwinds that feel like will continue to linger, and macro conditions kind of still uncertain volatilities, high interest rates rising. So should we expect a fairly slower grind in broader private equity fundraising as well kind of continue into '23? And then as you think about your own private equity fundraising cycle, what are your sort of expectations on completing the flagships?

Well, I think -- I mean, I think that we still have a lot of confidence that we'll complete our fundraise program. Part of the reason for that, obviously, is we got to -- we got off to a very strong start. And I think when you look at private equity fundraising for pools of capital like ours, generally, what happens is you have a very large first close because you have it -- you're getting re-ups or you're getting LPs that are coming in for the first time, but they've been working on it for a long time. So it's important that you have a robust sort of first phase of your fundraising cycle. The back half of it is generally a longer tail. The question is how long the tail is based on the market environment that you're in. And I think you're hearing the same thing from every firm, which is that the period from that post first close to final close is generally being elongated. And there's no question you're hearing that across the market. And I think that fundraises that you thought would get done in the first quarter or the first half of 2023 might end up taking into the third or fourth quarter of 2023. So I think it's being elongated for sure. I don't think the fundraising environment -- the more difficult tone to the fundraising environment in 2022 is going to change substantially in 2023, partly because you do have this sort of pushback where everybody is kind of pushing back into '23. And I don't see the -- we'll see if markets adjust more quickly than everybody thinks they're going to adjust in terms of recovery in public markets, the denominator effect and things like that. But I don't see that changing. I don't see that changing enough. I think the dynamic that will differentiate people with respect to success in fundraising is going to be more related to where are your relationships and what's differentiated about your strategy? And how do people feel about what you're doing. Our focus as a firm has basically been for a long time, and it's certainly not changing that we're not all things to all people. We're focused on certain sectors of the market where we feel we have a differentiated capability. If you look at our major sectors across the firm, whether it's capital and buyouts, whether it's growth equity, whether it's Asia, our major sectors tend to be health care, software enterprise technology, what we call Internet digital media business services, those tend to be kind of our kind of power alleys, if you will, from an industry perspective. It tends to be true across our franchise, across the organization because we have a culture at the firm. We call it shared themes and shared teams. We actually get around our organization, and we basically -- we share with one another interesting observations that we're seeing are -- the IP that we create over time about why do we think there's particularly interesting opportunities in one space versus another? Is that following -- or do those things follow one another around the world? Asia, for instance, is going through a pretty interesting period of time with respect to what's happening in health care. It's probably 5, 6, 7 years behind what's happened in the U.S. So those things kind of help drive kind of what we do. As a result of that, our portfolio has generally performed pretty well. There are areas of slowdown and change going on as a result of what's happening in economies around the world as a result of what's happening with inflation, et cetera. But our portfolio has been pretty darn resilient. And I think what's also happening is that as it relates to fundraising, I think larger firms that have more capabilities and multiple strategies are gaining share in this environment because the largest pools of capital want to do business with fewer GPs, they want to concentrate and focus their relationships because they get more out of those relationships. So they want kind of top of the house relationships, strategic dialogue, and they want to do things across the platform. And so I think that that's helping us on a differentiated basis. And we have a few strategies that are unique in the market, like climate that I was talking about before, where we're just clearly the innovator in the market, and we're clearly the market leader. So as a result of that, we're getting, I think, the opportunity to have sort of disproportionate airtime with a number of those large pools of capital. Yes.

Look, you mentioned portfolio company performance. Why don't we touch on that for a couple of minutes. If we look at TPG's results, returns are up over 6% across the private equity lineup, and the capital funds are up over 10% year-to-date, obviously, against a very difficult public market backdrop. Naturally, there's going to be some skepticism, cynicism. How is performance doing so much better when public markets are doing so much worse. So maybe help us unpack the sources of the upside. How are you thinking about the multiples that you're applying to the business, but also more importantly, what are you seeing with respect to the underlying revenue growth within the companies you cover that you own and operating leverage?

Yes. Well, first of all, I think that as far as multiples are concerned, obviously, multiple contraction in the public market is something that we recognize generally when we go about valuing our portfolio. And one of the things that we've been doing for a while is we -- I mentioned before, the fact that we monetized a lot of stuff going back over the last couple of years. As we were doing that, it wasn't lost on us. Part of the reason we did that is because we felt like things were valued very highly. And so as a result of that, when we started to think about how we were underwriting new investments and new deals, we were building in compression in multiples into our underwriting process. And so I think as a result of that, we're very cognizant of how different industries and different companies are being valued differently in the market. Number two is, I think, as I mentioned before, we've been focused on certain -- the way we've invested is we have focused on where in the market do we see secular change? Where in the market do we see secular growth? And we've been -- and we're very, what I would describe as a theme-based investor, okay? We look at these sectors where we have differential knowledge, differential relationships. We look into those spaces and we say, where there are differentiated opportunities for growth going forward. So even if you have a kind of downturn in the economy, or you have some of these pressures that we're now seeing, where are you likely to outperform as a result of that. So when you look across the portfolio, as a general matter, we're -- even in this environment, what we're seeing on top line growth across our portfolio, it varies a little bit by industry. But on top line growth, you're seeing something growth ranging anywhere from, I would say, the kind of the low 20s to high 20s in terms of top line growth, and an EBITDA, okay, which has changed a bit as a result of margin pressures here or there, depending on the situation, which we can talk about a little bit, you're seeing EBITDA growth that's somewhere basically between sort of, I would say, kind of low to mid-teens in terms of EBITDA growth. The portfolio is holding up very well. Again, it matters a lot where you are in terms of where your investment exposure is. Health care -- now as it relates to the overall portfolio, I would say that in terms of the pressures and the growth drivers in the portfolio, I think we're seeing kind of two different vectors that are kind of moving in opposite directions. One is a post-COVID recovery, which in our portfolio, we're certainly seeing in certain industry categories. Health care is an example. There's been a very substantial post-COVID recovery as a result of people kind of deferring. Like all of us go to the doctor, there's deferred maintenance during a period of time, right, where you're -- during COVID, you're not so anxious to do that, procedures, all kinds of different things in that space. So there's definitely kind of a post-COVID recovery. You're seeing that at the higher end of the consumer space in terms of things like experiential consumer, which has been a focus of ours; media -- certain media-related assets, which has been a focus of ours, you're seeing that post-COVID bump. The other vector, which is pushing in the other direction is obviously inflation, inflationary pressures and cost pressures. And we're seeing that across parts of our portfolio as well. So I would say that these are sort of offsetting effects, depending on the company, depending on the sector, we're seeing these offsetting effects in varying degrees across the portfolio. In our portfolio, where we have inflationary pressures as a result of things like cost to hire people, as an example, human capital cost. For us, it's much less input cost and more things like human capital cost. For us, in our portfolio, there have been plenty of places where we've been able to offset some of that pressure with pricing and pricing increases. Media space is a good example of that, where we've been able to move price. The high-end consumer space, experiential consumer, we've been able to move price. An example of that is something like in our portfolio like in our buyout portfolio, we own Viking Cruise lines, which is a very high-end experiential consumer opportunity, and we've been able to move price and bookings are at all-time record highs as an example. So now what's happening in the world, what's happening in consumer-focused economies, right, is that the consumer has been generally pretty well off that was helped by a tremendous amount of economic stimulus. Average bank balances around the world and around the country around this country, in particular, are higher than they've been. What are watch-outs for that? You're obviously seeing credit card debt expand, consumer debt expand right now at a pace that's probably the highest it's been in 15 or 20 years. So there's offsetting effects of that. Will that creep into what's going to happen in the consumer and affect the overall economy? I don't know. It may. I mean I'm not an economist. I'm not predicting whether or not we're going to be in a recession or not. [indiscernible] obviously -- is obviously of the view that it's going to be probably a softer landing as opposed to a harder landing.

And lateral path I think, is the right way we -- to talk about it.

The other part of our portfolio that's interesting to look at is software. We have a -- we're pretty active in that market. One of the things you're seeing is you're seeing a little bit of a disconnect right now between what public software companies are reporting. If you look at the earnings reports, about 2/3 of them have beat on estimates, and about 1/3 of them have been either at or below estimates, but that's a lagging indicator. It's a lagging metric because it's mostly GAAP reporting. The thing to look at the software is really more bookings, what's happening currently on bookings. And we're -- for the first time, in a number of years, we're starting to see slowdown in bookings on the top line in the software business. It's happening more. It's not the same across the whole spectrum. So where we've been focused, as an example, things like cyber as an example, or what we call development ops, DevOps, it's holding up better on the bookings line than maybe some other types of software strategies like business coordination or integration software technologies that are probably less mission-critical and a little bit more off. So our software book is holding up I think, reasonably well, although there is some pressure as a result of the bookings line coming down a little bit. So overall, I mean -- and if you -- and last point on this, and then we can move on. But in our Asia business, our Asia business has been more of a pan-Asia business than it's been a China business. To give you an idea, about 9% of our total AUM in Asia is China. So it's largely a non-Asia -- non-China pan-Asian business. which has caused our returns and our performance to hold up extremely well through this period of time. And many of our companies in Asia are either pan-Asian exposure. So they're benefiting from the non-China expansion in Asia, okay? Or for instance, we have a large exposure in India, which has been a very strong economy with really strong demographics. So the business -- the portfolio there has helped up quite well.

Great. Let's look forward a little bit and talk a little bit about deployment. So this has clearly been a bit of a slower year for deployment for yourself, but also for the private equity industry broadly. What are the biggest hurdles to deployment in private equity DC today? How big of an issue is the more challenging financing environment to getting deals done? And ultimately, as you look out into 2023 based on everything we just kind of talked about, it's not clear financing conditions are going to get a lot easier. Maybe they will, maybe they won't. But as you think about your own deployment pace into next year, what are your thoughts?

Well, I think deployment is definitely down. So the pace of deployment has slowed in private equity generally. Our pace of deployment has slowed because we're -- depending on sort of adjustments in terms of prices in the market, the number of opportunities where the opportunities are coming from. So just talk about that quickly for a second. Before going into this sort of market disruption and revaluation, the biggest driver of private equity flows in terms of the opportunities to deploy was essentially sponsor to sponsor, and that's changed quite a bit because naturally, sponsors are less inclined to sell companies based on valuation change. And so things -- what you're seeing in terms of adaptation to that environment, you're seeing things like sponsors looking to partially monetize not entirely exit. You're seeing things like where sponsors are willing to bring in a co-control partner, and you're also seeing opportunities for things like continuation vehicles to own a company for longer because it's not the right time to sell it. You really like the company. The risk reward since you're inside the company is very different in terms of owning it for a longer period of time. So the dynamics of sponsor to sponsor have changed a lot. A lot of focus on publics to privates because of substantial valuation change in public markets, probably been more take privates done in the last, I don't know, 8 months than there were in the prior, I don't know, 5 years. It's changed quite a bit in that respect. Take privates are always harder to get done, and take privates also require -- usually require large amounts of committed financing, which gets to your point on the financing environment. Financing environment is tougher. One of the things, though, that you should focus on in terms of differentiation in different sponsors is that the largest sponsors, and we're certainly one of them in this category, have substantial capital markets capability ourselves. So one of the things you're starting to see is that banks have pulled way back from the market. It's obviously been well documented and well written. Obviously, there's been substantial -- there's been turmoil in terms of what people think of as the broadly syndicated loan market as a result of markdowns and value changes and losses in banks as a result of that. So just generally for that reason and the uncertainty in the environment more broadly, regulatory reasons, et cetera, banks continue to move away from essentially the provision of liquidity and financing. And so one of the things that we're doing is we're essentially more self-reliant in terms of being able to fund our deals and finance our deals. So in October, just to give you an idea, we had a fairly active deployment month in October. Again, that was the result of a tale of a number of deals we were working on for a while. But we deployed about $3.5 billion of equity in our buyout business in October. And there was about $5 billion of financing associated with that, and TPG essentially was kind of a top line driver of the entire $5 billion of financing. So a bunch of it, we arrange directly with LPs ourselves. A bunch of it we arrange with some other direct lending institutions that we have close relationships with. So we have a fairly built out capital markets capability that helps actually finance our own deals. So as a result of that, there's, again, more of a -- there's a bit of a split in terms of what's going on in the market. Sponsors that don't have that capability, smaller sponsors, are more reliant on going either directly to banks or directly to direct lenders to make sure that they're arranging that financing, we can drive that ourselves. So I think the financing limitations are real in the market, but I think that they are muted in effect by the fact that we have the ability to arrange a lot of financing directly ourselves. So I think that's a factor. But I would say generally, though, deployment is down as a result of substantial valuation change. Bid-ask spreads are closing, but they're not completely closed yet. We're seeing that change kind of weekly in terms of people getting their heads around sort of where valuations are in the current market. The one exception, I would say, on our deployment pace is in climate. Again, as you know, we raised a $7.5 billion climate fund about a year -- a little less than a year ago. We're probably -- we probably deployed around $3 billion of the $7.5 billion. The flow of opportunity there is exceptional. And my guess is we'll deploy that fund faster than we had originally thought we would deploy and we'll be back in the market again. And so that would be, I would say, a bright spot in deployment. And then the last thing I would say is real estate. Our deployment real estate, we raised our largest fund by a factor in the last -- when we raised what we call TREP IV. We raised about $6.8 billion in opportunistic real estate strategy. We also raised our first Core Plus strategy. We have purposely slowed our deployment in real estate, and have deployed actually very little of that fund so far. And the reason is because we've seen a relatively historic in terms of speed of change move in real estate as a result of inflation and interest rate changes and the upside-down nature of the market in terms of where financing costs are versus cap rates. And I think that's going to continue to wreak havoc in the real estate environment more generally. If you look at different categories of real estate, some of them holding up well. They are because things like maybe it's multifamily or maybe it's special purpose real estate like industrial or things like that. Some of the markets holding up reasonably well, but there's a -- what financing rates, the cap rates would imply is something like a 30% to 40% change in valuations in the real estate market. So we've been very tactical as a real estate franchise in terms of focusing on certain parts of the market, missing other parts of the market like office where we have virtually no exposure. And we've had a number of conversations. I've in fact, been sitting in, in a number of conversations with LPs, where we've been talking about our real estate strategy, but we have purposely slowed deployment there because we think that the opportunities are going to be really interesting. And it's an area also where we're forming new capital right now around a credit strategy in real estate because I think in my number of years of being in the business, I think certainly in the last decade since the global financial crisis, this is the single best moment in opportunistic real estate credit that I've seen in a dozen years. All kinds of fallout as a result of this change in rate, change in real estate valuations, and we see really interesting opportunities. We have a commercial mortgage REIT, and we're now trying to raise a private pool of opportunistic capital around this -- against this opportunity. And we recently hired Doug Bouquard from Goldman Sachs, actually, who is a 20-plus year veteran here from -- who ran a lot of the mortgage and real estate credit businesses here. And so we're -- that's an area we think is a really interesting opportunity to grow.

Great. Well, I had a couple more, but we're unfortunately out of time. So I appreciate you being here. Thanks for the time.

Thanks, Alex. Appreciate it. Thank you.