TPG Inc. (TPG) Earnings Call Transcript & Summary

Maybe 1 -- I would add another thing is it's important to also recognize and you may already appreciate this, that TPG is very well known for its approach to both the sourcing of investments and the exits through corporate partnerships. So we're known kind of to -- we're known for sourcing investments through corporate carve-outs and then for exits through corporate -- we're selling to corporates to strategic corporates. As an example for our capital franchise, over 50% of [indiscernible]. Lead it. Thank you. , everyone. So our approach to essentially approach to strategic exits is well known, over 50% of our exits in our capital franchises through strategic exits -- that said, of course, we're -- we utilize the IPO market when it's there, but we're not obviously overly reliant on that. So overall, we're positively inclined in terms of the realization environment as we get towards the end of the year and into next.

Maybe just 1 more question on realizations. So you talked about how you guys have been using AI and that's driving value creation at all of your portfolio companies -- in terms of realizations, though, you historically have maintained greater concentration in software investments in the PE business relative to many peers. So for the software sleeve in particular, how does the realization outlook compared to the broader portfolio, where are you seeing the most attractive opportunities to monetize there?

Yes. So I think Jack touched upon that. We obviously went through this period over the last 6 months of a lot of focus on so-called SaaS porcelipse, what is AI going to do to the software sector. And frankly, we kind of lost all of the nuance. It was really is it software or is it not? I think we're back now in a more rational environment where there's an understanding, and there's actually a lot of appetite from buyers for quality software companies. So quality software companies means really companies that are in a market-leading position that have robust operating performance. and that are front-footed in terms of embedding AI within their offering to further strengthen growth opportunities to really create new growth pathways for their offering. So we're seeing that interest from buyers. We're seeing that opportunity for ourselves, for our portfolio of software companies, where the vast majority of them are really on that that side of the spectrum where AI is an opportunity is a way to further strengthen the growth opportunity -- and as kind of that bid offer spread narrows, we're confident that ultimately, we'll be able to monetize those investments.

Maybe 1 more kind of AI related question, maybe for Jack. So AI has been a pretty defining theme across this space. Beyond the implications for software portfolio companies, where else does TPG participating? So to what extent are portfolio companies adopting AI? And where else do you attract investing across that ecosystem?

Yes. It's a good question. I mean you step back and think about how we invest in private equity from the beginning from when David and Jim created the company, they had a -- their thesis was we need to be more than financial investors. We need to add operational excellence to our portfolio companies, help them build better businesses that went to the first hire they made. We've since then built one of the leading operating groups in the industry. We are well known among our LPs. We're helping companies improve their operations under our ownership through lots of tools, right? In the early days, it is more cost focused -- and over the next couple of decades, we converted that group more to focus on helping drive faster revenue growth through things like pricing optimization digital marketing, lots of ways to use new tools to drive faster revenue growth than companies might have been doing on their own. Well, the biggest tool in that toolbox now is Agentic AI. And there's unending demand from our CEOs of our portfolio companies to have us help them drive operational excellence through the use of AI. So we're actively doing that, both internally and TPG and with our portfolio companies. And we talked about some of the software examples of that, Bumi, Lyric, et cetera, but there's lots of examples across business services companies. On the investing side, we're applying the same lens of what can we do with a given company that we're looking to acquire to improve the business and drive better returns through that acquisition, right? I mean AI has become, not surprisingly, a firm-wide investment thesis, and we look at things like AI infrastructure, we look at vertical market AI applications -- some of that is happening in our portfolio. Some of it is through new acquisitions, business services companies that we can acquire and AI enable and drive thousands of basis points of margin improvement. Cybersecurity is, we think -- I mean, all you have to do is read the headlines to realize how dangerous some of this can be, if not controlled well in a security environment, so the cybersecurity opportunity to help control this risk, we're seeing that through Delinia like accelerating growth. So those are the -- some of the themes that we're deploying in our new acquisitions that we're making. It includes we partnered with Tata in India to invest $1 billion in their data center business. So everything from infrastructure to vertical market applications to services transformations, the other investment we've talked about is part -- we're obviously already investors in the major platforms, OpenAI and Tropic base, et cetera. We also partnered with Open AI to create a brand-new company called inelegantly called deploy go for now, which is basically a go-to-market deployment company majority owned by Open AI, we're the biggest outside financial investor to kind of picks and shovels play on enterprise AI deployment. Think about it as a next-generation services company, employing forward deployed engineers that are organized by industry vertical and by business process to accelerate the adoption of Agentic AI solutions by businesses across the economy with good forward deployed engineers. So that's a brand new business we're creating. -- lots of ways to, we hope, intelligently invest around this secular trend.

Great. Maybe we'll switch gears a little bit and talk about credit. So maybe Axel, just to start. So you joined TPG after a long career in the insurance industry. So how does that background influence the way you think about TPG's opportunity set with that set of LPs? And then beyond the firm's existing partnerships, you mentioned Jackson I know there's many others. But what are your longer-term ambitions for that part of the business?

Yes. Yes. So having been in the insurance industry for a bit, kind of I've seen really the different models in which the alternative investment industry can partner with the insurance industry. I think that's our approach, which is kind of a balance sheet-light approach focused on strategic partnership is really very beneficial to the business model of the firm and also to shareholders. I think it enables us the strategic partnership approach enables us to grow significantly of fee-paying AUM, significantly scale our origination capabilities across the whole credit spectrum without the kind of burden of volatility and capital intensity that comes with owning an insurance company. I think the partnership with Jackson is off to a terrific start. We have $4.5 billion of commitments to date across our investment-grade asset-backed finance platform and our direct lending platform, we're actively deploying in those strategies. We're looking for ways to expand the relationship across some of our other asset classes, things such as real estate credit would be a natural fit foreign insurance balance sheet and could meet Jackson's objectives. And then as we -- it's fair to say that we're early in our journey of partnering with the insurance industry. We have a number of SMAs and then we have the strategic relationship with Jackson. I think the opportunity to scale that is clearly there. The opportunity to scale with further SMAs, of course, that partly are the beneficiaries of the new capabilities and origination capabilities we're building in the context of the Jackson relationship, but also other forms of strategic partnership that may look like the Jackson relationship or may look somewhat slightly different. Ultimately, I think the balance sheet approach, the FRE-centric approach of TPG is really beneficial and ultimately will really drive value creation for TPG shareholders.

And maybe expanding on that. So you guys have discussed further expanding your IG and ABF capabilities to better serve insurance clients. So what's the current scale of that part of the business and your origination capabilities? And similarly, how do you see that evolving over time?

Yes. So our investment-grade asset-backed finance platform, sort of the insurance clients, and other institutional clients, across residential, commercial and consumer assets. The investment grade part of that equation is really part of the capital structure part of the capital structure that naturally comes with a capability that Angelo Gordon had built over many, many years. So really, what we're doing in the investment-grade side is we're benefiting and leveraging the same capabilities. So the sourcing, underwriting and structuring capabilities that Angelo Gordon had built over decades are now put to work and towards the higher quality part of the capital structure. We're very pleased with the level of origination that we've been able to accomplish. We've reviewed, for example, year-to-date over 70 potential transactions on the IG ABF side, representing about $25 billion of potential transaction volume -- and we have a very healthy pipeline looking out towards the end of the year. So very, very pleased with the progress thus far. And I think we're kind of pleased with the flywheel effect that we're seeing through insurance relationships partners that trust us that enable us to further scale and develop our capabilities and then be able to provide a more attractive offering to the insurance sector and to other potential piece.

And maybe, Jack, for you. Can you talk a bit about what you're seeing on the direct lending side. A bit of an update on borrower fundamentals, portfolio company health and maybe touch on TCAP a bit, which is seeing much lower redemption requests in a lot of your competitor funds? And maybe what factors do you think have contributed to that this year?

Sure. Let's start with for those of you who don't know defining what we do and we don't do in direct lending because that feeds into what TCAP is, right? So win, when we acquired Angle Gordon, I have to admit, I didn't know as much as I should have known about Twin Brook because I've been around leverage finance markets for almost 40 years, but always operating at a little bit larger scale. And Twin book to their credit has stayed totally true to their disciplined approach of investing of lending only to lower middle market companies, which in their vernacular is less than $25 million of EBITDA. And I never operated down that space on the private equity side. So the more I studied it during our diligence, the more I appreciated the differentiation of the business. Because that's kind of what I think of what direct lending used to be, lending to smaller companies that don't have access to the big liquid syndicated loan markets. So Twin Brook is not held accountable to providing competitive terms with that market, right? We lend on average at probably 4x EBITDA, not 6 or 7x EBITDA. Coverage ratios are higher. We control the revolver in almost every loan we make. We have maintenance financial covenants that let us actively manage risk. Now in return for that, we're lending to smaller companies. We have to be a good credit underwriter and make sure we manage that risk effectively. And in fact, we have. So we've seen very little deterioration in credit quality. The current interest coverage ratio in the portfolio is still running around 2.4x. The nonaccrual rate is 1.4%. And the PIK rate is almost nonexistent. In a world where companies often larger companies that started with tighter capital structures with higher degrees of leverage in a lower rate environment have seen rates move higher and the lender has often had to offer the borrower the right to pick. So you see pick rates elsewhere in BDC land going a little higher, Twin Brook has virtually no PIK. So it's those credit fundamentals, along with continuing to generate about a 10% return. But I think the investors -- so TCAP is our BDC that feeds into Twin Broker is 1 of the sources of capital for us in Twin Brook. And I think it's that stability of the portfolio, the consistent returns the outperformance versus the leverage loan market. And I think any investor, whether it's -- we also have a balanced mix of institutions and retail in TCAP. And I think any institution or individual investor who chooses to invest in Twin Brook or TCAP is doing it for an express purpose. You don't trip across TCAP and choose to invest in it because it's easy to buy. You do it because you want to lend to the lower middle market companies. And as long as you're getting the bargain you wanted from that investment, good returns and well-managed risk, and low risk metrics. The incentive to redeem is just much, much lower. So you're right, in Q1, Q2 and Q3, respectively. Roughly, we saw 1%, 2% and 1% redemption rates. So far below the 5%, the LP base is very stable and happy with what they've invested in.

Why don't we move to real estate real quick. There's a bunch of flagship funds as part of this year's guidance. You've indicated a lot of confidence here and previously, and your expectations for underlying demand. So maybe talk a bit about your conviction in the real estate platform at a time when the asset class has been a bit more challenging for some competitors?

Sure. I mean our real estate business, the -- so you're right, we've talked about the fact that we are entering again, back to the theme of having diversified our fundraising across many more businesses, right? We've been through a period of raising a lot of credit capital, we're still raising a lot of credit kind of an always-on business. as we finished refreshing our big buyout fund, TPG Capital. Fortunately, we're now about 80% invested in our largest flagship real estate fund that Axel referred to TREP, TPG Real Estate Equity Partners. And so we're ready to have a first close there relatively soon. We'll talk about that in either the third or fourth quarter call. But the confidence we have in that, if you step back and look at it, it's got to be based on returns, the returns we've generated from that business since we organically built it in the financial crisis, 2007, '08, '09, we saw the dislocation in the market. We took some of our team members who had a history in real estate, had them build a team and build a business from scratch. And that ended up being a great thing to do. We've scaled it since then. We generated good returns. Our current TREP fund is a $6.8 billion fund. -- we've talked about having a lot of confidence that we're going to raise more than that in this wave of funds. That is now informed by a lot of our dialogue with our LPs because we're approaching a first close.

All right. Maybe one last one for you, Axel and I want to -- I'll squeeze a couple in here because we just have a few minutes left. So I guess, first, we've got this large fundraising cycle and accelerating deployment, which would be supportive of revenue growth. So as those drivers play out, how do you think about the implications for TPG's earnings profile? And how should investors think about the longer-term margin expansion potential? And the other if there's time wants to squeeze it in as a new CFO, TPG has expanded inorganically into credit, digital infrastructure. So how are you thinking about additional or incremental inorganic growth opportunities what might be most strategically attractive.

Okay. I'll try and do this for Craig. So on FRE margin, we kind of restated on second call our guidance of a 10% margin for 2026. Rest assured that is a milestone, not a stopping point. As we look out, we believe that our margin should expand into the 50s over time. And that's really kind of supported by a few kind of structural drivers. We talked again and again here about fund over fund growth, whether it's in well-established strategies, whether it's in Generation 2 versus generation 1 that fundamentally enables us to generate more revenues with either the same size teams that we have or small addition to the team. #2, we've raised a significant amount of capital towards the credit strategies that only -- that start earning revenue upon deployments. And so as we deploy that dry powder, we're going to significantly add to the revenue stream. We talked a lot about on the last quarter about our record revenues for our capital markets business. We believe we're really only in the middle innings of the potential for revenue generation from that business. We've been very intentional about embedding our broker-dealer capabilities across our entire platform and strategies. So for example, in second quarter, we had 20 different transactions contributing to a revenue stream across 14 strategies across all platforms. And lastly is kind of the natural operating leverage that comes with operating at a larger scale. That includes just like for a lot of other industries, the use of AI, the use of AI towards data-intensive and workflow-intensive tasks. That as we deploy AI should enable us to really get more productivity or efficiency and be gain, ability to have better resource allocation of our people. So maybe moving on quickly to the inorganic side. Look, inorganic, we believe, is a component of how we deliver upon our long-term growth strategy. Clear track record of executing on that and successfully integrating the AG transaction, the Peppertree transaction, are great examples of how we've added to our platform. We've added to our ability scale our platform. We've added -- keep nice kind of tuck-in capabilities that came into very specific verticals. So as we think about inorganic opportunities, #1, we want to maintain a very high discipline as we evaluate potential opportunities, and we really look for kind of 3 core components: strategic fit, cultural fit and the potential for long-term value creation. Some of the areas that we find particularly interesting I think, around the LP secondary space where kind of that -- having that scale and that information advantage really matters. And then infrastructure, infrastructure, we continue to believe with high conviction is one of those long-term secular opportunities across the globe. So these are kind of examples of the types of things where we would be considering potential inorganic additions to our platform.

Great. Well, we're out of time. So we'll have to leave it there. But Jack, Axle, thanks so much for being here. Appreciate your time.

Thank you.

Thank you.