TPG Inc. (NASDAQ:TPG) Q1 2024 Earnings Call Transcript May 8, 2024
TPG Inc. misses on earnings expectations. Reported EPS is $0.04259 EPS, expectations were $0.43. TPG Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome to the TPG’s First Quarter 2024 Earnings Conference Call. Currently, all callers have been placed in a listen-only mode. And following management’s prepared remarks, the call will be open for your questions. [Operator Instructions] Please be advised that today’s call is being recorded. Please go to TPG’s IR website to obtain the earnings materials. I’ll now turn the call over to Gary Stein, Head of Investor Relations at TPG. Thank you. You may begin.
Gary Stein: Great. Thanks, operator, and welcome, everyone. Joining me this morning are Jon Winkelried, Chief Executive Officer; and Jack Weingart, Chief Financial Officer. In addition, our President, Todd Sisitsky, is also here and will be available for the Q&A portion of this morning’s call. I’d like to remind you this call may include forward-looking statements that do not guarantee future events or performance. Please refer to TPG’s earnings release and SEC filings for factors that could cause actual results to differ materially from these statements. TPG undertakes no obligation to revise or update any forward-looking statements except as required by law. Within our discussion and earnings release, we’re presenting GAAP and non-GAAP measures.
We believe certain non-GAAP measures that we discuss on this call are relevant in assessing the financial performance of the business. These non-GAAP measures are reconciled to the nearest GAAP figures in TPG’s earnings release, which is available on our website. Please note that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any TPG fund. Looking briefly at our results for the first quarter, we reported GAAP net income attributable to TPG, Inc., of $16 million and after-tax distributable earnings of $181 million or $0.49 per share of Class A common stock. We declared a dividend of $0.41 per share of Class A common stock, which will be paid on June 3 to holders of record as of May 20.
With that, I’ll turn the call over to Jon.
Jon Winkelried: Thanks, Gary. Good morning, everyone. TPG entered 2024 with significant momentum as a result of the step function change in scale, diversification and earnings power we experienced last year. This was driven by three primary factors: One, our successful fundraises for existing TPG strategies with vintage over vintage growth for our funds in TPG Capital, healthcare partners, Asia and Rise. Since going public, we have completed six successor fund raises in our private equity and real estate strategies and increased fund sizes by 27% on average. I’m pleased with the strong results our teams achieved, particularly in the face of a difficult fundraising environment. Two, our continued ability to innovate and grow organically into new areas, such as GP-led secondaries and real estate credit.
And three, most notably, our acquisition of Angelo Gordon where we expanded into credit investing at scale and doubled the size of our real estate platform. To frame the breadth of our transformation at the end of the first quarter compared to a year ago, we grew our team over 60% to approximately 1,800 professionals. Our number of strategies increased from 18 to 30. Our fee-paying AUM grew 74% from $79 billion to $137 billion, and importantly, we are now more diversified with scaled platforms across private equity, credit and real estate. The latter two asset classes currently represent 44% of our total AUM. I’d like to take a moment to highlight our business in Asia, where we are celebrating our 30th anniversary. Since we first started investing in Asia in 1994, we’ve built a multi-strategy franchise with dedicated buyout, secondaries and real estate funds.
We also actively invest in the region through our global growth and impact funds, and we’ve been particularly focused on markets such as India, which is one of the fastest-growing economies in the world. Over the last five years, more than 40% of the capital we’ve deployed in Asia has been in India, and we’ve taken eight portfolio companies public there since late 2021. In the Asia region broadly, we currently have over 250 colleagues working across nine cities, and we recently completed several important fundraising campaigns that reflect our momentum and scale. Within our private equity platform, we held a final close for TPG Asia VIII last month. We raised approximately $600 million in the first quarter and over $345 million in early April, bringing the total fund size to approximately $5.3 billion 14% larger than its predecessor.
In addition to the strong result in private equity, we also held final closes for two TPG AG real estate funds, Asia Realty V and our first Japan Realty Value Fund. We raised more than $2.5 billion of capital in aggregate, and both funds exceeded their respective fundraising targets. Looking ahead, we plan to extend our leadership position in Asia with near-term plans for further organic growth. Our credit platform is also experiencing strong momentum. In 2024, we’re raising capital across credit solutions, middle market direct lending and structured credit. Since closing the Angelo Gordon acquisition in November, we’ve made meaningful progress introducing our respective TPG and AG clients to one another and delivering the combined platform with a particular focus on credit.
We raised more than $2 billion in credit in the first quarter and over $800 million since quarter end, driven by closes in middle market direct lending and credit solutions. Notably, through April, we’ve closed on approximately $1 billion for our third essential housing fund within Credit Solutions. Essential housing was built to address the growing demand from residential homebuilders for bespoke land financing solutions. It’s a great example of a scalable origination platform we created organically to provide our clients with a differentiated strategy and risk return profile. We’ve also been making good progress on organic growth initiatives and scaling new businesses. We expect our climate franchise to drive meaningful growth throughout 2024 and 2025 as we build on our market leadership position and impact investing.
We are currently in the market with three climate strategies. The first is Rise Climate, our dedicated climate private equity strategy, which we launched in early 2021. The enormous capital needs for energy transition, combined with our focused investment strategy and distinctive sourcing capabilities, have generated robust pipelines and highly attractive investment opportunities over the last three years. Our inaugural fund, which is approximately 85% invested in reserve had value creation of 21% over the last 12 months. We are currently in the market with our second Rise Climate Fund and are seeing strong interest from both existing and new clients ahead of an expected first close in the third quarter. Secondly, we continue to innovate our climate private equity strategy through our recently launched Global South initiative.
This is a new frontier for us focused on driving much needed capital to tackle the decarbonization challenge across the Global South. We announced an anchor commitment from ALTÉRRA at the end of last year and expect to raise additional capital this year. And our third strategy is climate infrastructure, which we are building organically within our Rise platform. The energy transition will require a complete reconfiguration of global infrastructure and we are well positioned to become a leading provider of climate-related infrastructure capital. We continue to anticipate a successful first close for this strategy later this year. Our largest and most important clients are highly supportive of our efforts in Climate. And in the near term, we expect to announce additional strategic initiatives with partners that will continue to help us scale these strategies.
We managed $19 billion of AUM across our market-leading impact platform today and expect to grow to more than $35 billion of AUM within two years. TPG GP solutions, our normal European and North American GP-led secondaries fund has completed five investments to date and in every transaction, we’re engaging in meaningful bilateral dialogue between TGS and the sponsor to directly negotiate the transaction ahead of a broader syndication. Over the last several months, I’ve met with dozens of our largest clients around the world and the topic of secondaries, especially GP-led secondaries has been consistently top of mind given the liquidity pressures across private equity today. We expect to scale this strategy meaningfully over time. Finally, I’d like to highlight our focus on private wealth, where we are expanding our global distribution capabilities and developing products specifically tailored for this channel.
We have historically raised $1 billion to $2 billion of capital annually from the wealth channel, and we’re focused on growing that figure by several multiples over the coming years. During 2024, we plan to raise capital for nine products in the wealth channel, including climate, growth, credit solutions, direct lending and structured credit. Looking forward, we plan to further expand our product set through the launch of semi-liquid funds beginning with private equity. We believe we are well positioned to offer retail investors differentiated products given our strong track record, distinct investment style, well-established global brand and existing relationships with key distribution partners. The addition of TPG AG credit, especially TCAP, our nontraded BDC managed by Twin Brook has accelerated our growing presence in the channel.
Turning to deployment. You might recall from our last several earnings calls that we have been accelerating the pace of deployment across our platform, particularly in private equity and real estate for much of the past year. That trend has continued. In 2023, our deployment pace more than doubled in the second half of the year compared to the first half and has remained strong through the first quarter of 2024. We believe our robust investment activity relative to the broader alternative space has been driven by our distinctive sector-based sourcing approach and patient targeted strategy of developing our own proprietary opportunities including corporate carve-outs and structured partnerships. With over $51 billion of dry powder in an increasingly active market, we are well positioned to capitalize on the differentiated opportunities that our global investment teams are sourcing.
We invested over $6 billion of capital in the first quarter, and I’ll highlight some notable recent activity. Starting with our private equity strategies, our funds are on track for a three- to four-year deployment cycle. We continue to expect structured partnerships and carve-outs to be an important source of proprietary deal flow and are also beginning to see more sponsor to sponsor activity. Highlighted an interesting example of a corporate partnership after quarter end, our Rise and Rise Climate Funds invested in Syre, a company founded to decarbonized and de-waste the textile industry through recycling at hyperscale, starting with polyester. We are making this investment together with several key partners, including H&M, which entered into a multiyear offtake agreement for a significant share of their recycled polyester demand in connection with this transaction.
Next, our real estate platforms ended the quarter with nearly $15 billion of dry powder on a combined basis. Our diversified capabilities with dedicated pools of both equity and debt capital enable us to provide solutions across capital structures globally. Within our equity strategies, a higher for longer rate environment is continuing to create a wide range of investment opportunities that we are pursuing on a very selective basis. Last month, TPG Real Estate completed the acquisition of a large office building in downtown Manhattan that will be converted into an approximately 800 unit multifamily rental property. This was a result of our broader thesis on secular headwinds within the office market and the opportunity to pursue office to residential conversions as multifamily fundamentals in New York City have been historically resilient.
Within TPG AG real estate, our net lease business is seeing a significant increase in activity from corporate owner occupiers looking for sale leaseback transactions. Given the cost and challenges within the traditional financing markets, many companies are seeking alternative forms of balance sheet financing. As a result, we are seeing entry cap rates at their 15-year highs. During the first quarter, we entered into three separate sale leaseback transaction in highly attractive sectors, which are insulated from typical economic cycles. Our real estate credit strategy, TRECO, is purpose built to leverage our leading real estate platform and capitalize on what we see as the most attractive investing environment in the last two decades to provide capital solutions across the real estate credit market.
We activated our inaugural fund in the first quarter and have already closed three investments, which underwrite mid-teens returns. The first investments are concentrated in the multifamily housing sector and are representative of the opportunities we are seeing as a result of elevated borrowing costs and a reduced lending appetite from banks. Finally, within credit, we deployed over $3 billion across our strategies in the first quarter. During what is normally a seasonally slower quarter, Twin Brook, our lower middle market direct lending business had its busiest first quarter ever with approximately $1.7 billion of net originations. Most of this volume was driven by M&A activity from sponsors seeking liquidity within their portfolios given the improved valuation environment.
The pace of deployment with our asset-based lending and specialty finance strategy remains very strong as clients continue to diversify a portion of their fixed income allocations to private structured credit opportunities. During the quarter, TPG AG’s first asset-based private credit fund, ABC, together with Barclays Bank announced a new lending partnership with Funding Circle to provide up to GBP 300 million of small loans for businesses in the U.K. ABC is already more than 75% deployed, and we are in the market with our new evergreen vehicle and our second ABC fund with anticipated closes in the second half of the year. Our corporate credit strategy, Credit Solutions continue to rotate its portfolio in response to changing market conditions.
In 2022, we took advantage of higher yields and lower dollar prices to deploy capital opportunistically into the public debt markets. As spreads have tightened over the last year, recently touching near five-year lows, we’ve shifted our focus to private opportunities where we control the economic, legal and structuring terms. Across our Credit Solutions funds, we generated more than $2.5 billion of gross sales over the past 12 months, achieving strong returns and recycling the proceeds into bespoke private financing transactions on what we believe are highly attractive terms. TPG AG Credit Solutions is well positioned as one of the few letters of scale and our pipeline for deployment is robust as corporate borrowers and sponsors seek sizable creative privately structured financing transactions.
Moving to realizations. As we’ve mentioned before, we aggressively monetized our portfolio during the period of peak valuations a few years ago. Since mid-2022, we have been net buyers given the investment opportunities arising from the market dislocation. But now as we enter a relatively more stable environment with improving valuations, we are beginning to see selective monetization opportunities. We are cautiously optimistic regarding the outlook for potential realizations as our pipeline gradually builds. In the first quarter, we sold approximately half of Rise Climate’s remaining position in Nextracker following its successful IPO just over a year ago. And last month, TPG Growth exited its investment in Onfido, a global leader in identity verification through a sale to Entrust.
Capital Asia closed the sale of Singlife to Sumitomo Life during the quarter, bringing to conclusion a distinctive deal for our Asia franchise representing the first ever private equity insurance transaction of scale in Southeast Asia. And just last week, we successfully took Viking Cruises public and a $1.8 billion offering, the largest U.S. IPO so far this year. We priced near the top end of the initial range, and we’re able to upsize the offering by over 45% from launch due to strong investor demand. The book was multiple times oversubscribed from high-quality blue-chip accounts. We originally invested in Viking in 2016, providing the Company with its first institutional equity capital investment. We subsequently leaned in during the height of COVID in 2020 with a significant follow-on preferred investment.
This was driven by our confidence in the Company’s long-term differentiated positioning and post-pandemic, Viking continues to achieve record booking levels. We’re incredibly proud of the partnership we have built together. Taking a step back, we’ve successfully executed across a number of growth opportunities and our platform is substantially more scaled and diversified today. Since our last earnings call, we posted advisory committee meetings for six of our strategies, attended by nearly 150 of our LPs, and I’ve met with some of our largest clients around the world, including a visit to the Middle East a couple of weeks ago. Given the depth of our relationships, the focus of our conversations has evolved from single strategies to engaging on cross-platform solutions and meaningful strategic partnerships.
Our largest clients want to do more with us, and we believe we are well positioned as the partner of choice, given our track record of delivering strong investment performance and differentiated deal flow. This is one of many clear levers we see to drive continued growth, and we look forward to executing on these opportunities over time. Now I’ll turn it over to Jack to review our financial results.
Jack Weingart: Thanks, Jon, and thank you all for joining us today. We ended the first quarter with $224 billion of total assets under management, up 63% year-over-year. This was driven by $75 billion of acquired AUM from Angelo Gordon, $18 billion of capital raised and $7 billion of value creation, partially offset by $13 billion of realizations over the last 12 months. Fee earning AUM increased 74% year-over-year to $137 billion, and we ended the quarter with more than $51 billion of dry powder, representing 37% of fee earning AUM. We also had AUM subject to fee earning growth of $25 billion at the end of the quarter, of which $14 billion was not yet earning fees. Our fee-related revenue in the first quarter was $451 million, up 70% year-over-year, primarily driven by the acquisition of Angelo Gordon.
It’s important to point out, though, that in addition to the growth attributed to AG, TPG on a stand-alone basis grew fee-related revenue 20% organically year-over-year. Our Q1 FRR included management fees of $403 million and transaction fees of $34 million. The first quarter is typically seasonally light for new deal closings, but our transaction fees were strong due in part to a number of opportunistic refinancings for our existing portfolio companies, taking advantage of improving credit market conditions. Looking forward, we expect to drive further growth in transaction fees as we expand our capital markets team and integrate our broker-dealer capabilities into the TPG AG platform. We reported fee-related earnings of $182 million for the first quarter, up 84% year-over-year.
And our FRE margin was 40%. As we noted on our last call, our normalized margin has blended down through the inclusion of TPG AG, and we now have an opportunity to drive profitable growth through margin expansion. Although our FRE margin will fluctuate quarter-to-quarter due to items such as catch-up fees and transaction fees, we expect our margin to exceed 40% for the full year in 2024 as we realize operating leverage from the integration and scaling of our businesses, while also investing in growth initiatives. Moving below FRE, we had $32 million of realized performance allocations in the quarter. While we’ve been net buyers over the last couple of years, we are gradually building our realization pipeline as the exit environment improves.
As Jon mentioned, just last week, our portfolio company Viking Cruises, executed a highly successful IPO, the largest U.S. IPO so far this year. This is the largest remaining position in TPG VII, a 2015 vintage fund and we sold approximately $675 million of equity in the offer. We continue to differentiate ourselves with our fund investors through our consistent return of capital. While TPG VII is a strong promote paying fund, this particular monetization will not generate promote due to the fund waterfall mechanics. We currently expect PRE to begin picking up in the back half of this year. Our realized investment income and other line item in the first quarter included $8 million of noncore expenses related to the acquisition and ongoing integration of Angelo Gordon, a step down from $18 million last quarter.
We expect to incur a similar level of quarterly noncore expenses through the end of this year, primarily focused on IT investments to integrate our operating platforms. After-tax distributable earnings for the first quarter totaled $181 million or $0.49 per share of Class A common stock. Our effective corporate tax rate was lower than usual in the quarter due to the tax benefits of the first annual vesting in January of our IPO and ordinary service RSUs. We expect this will be a recurring seasonal factor in the first quarter of each year going forward. Turning to our GAAP balance sheet. During the quarter, we issued long-term bonds for the first time, benefiting from the strong investment-grade credit ratings we obtained in connection with our IPO.
We raised $1 billion through the highly successful issuance of 10-year senior notes and 40-year subordinated notes. We used the proceeds to fully repay our revolver which we had drawn in the fourth quarter in connection with the AG transaction to fully repay our term loan and to replenish additional cash on our balance sheet. Following these transactions, our balance sheet remains conservatively capitalized with moderate leverage and ample liquidity. We ended the first quarter with more than $290 million of cash and cash equivalents and $1.2 billion of undrawn capacity on our revolver, providing us with significant flexibility to continue investing in growth. Our net accrued performance balance at the end of the first quarter was $915 million compared to $891 million in the fourth quarter.
This 3% increase was driven by $56 million of value creation in our investments, partially offset by the $32 million in realized gains. At the end of the first quarter, our performance-eligible AUM totaled $193 billion or 86% of our total AUM and of which $153 billion is currently generating performance fees. Our investment portfolio has continued to perform well. We generated positive value creation across all of our platforms for the first quarter and last 12 months. Our private equity portfolio, which includes capital, growth and impact platforms, appreciated approximately 2% in the first quarter and 7% over the last 12 months. In aggregate, our portfolio grew revenue by 19% over the last 12 months and margins have remained stable. Our credit portfolio appreciated 3% in the quarter and 15% over the last 12 months.
This performance was consistent across our credit strategies and was driven by continued strong credit selection and low annualized loss ratios. TPG’s real estate portfolio appreciated approximately 4% in the first quarter and 1% over the last 12 months, and TPG AG’s real estate portfolio appreciated 40 basis points in the first quarter and 1% over the last 12 months. This positive value creation in a challenging commercial real estate market is attributable to the quality of our portfolio construction in our core thematic areas. These defensive sectors such as light industrial and student housing continue to see strong secular demand growth limited supply and rental rate improvements. Turning to fundraising. We raised $4.7 billion during the quarter.
Approximately $2.1 billion of this capital was raised across TPG AG credit with nearly $1 billion in Credit Solutions and approximately $600 million in middle market direct lending. In addition, our private equity strategies raised $1.8 billion with incremental closings across Asia VIII and Growth VI. Looking forward, consistent with our prior guidance on fundraising, we continue to expect total private equity and infrastructure capital raised in 2024 to grow compared to 2023. Driven by the fundraises for growth and Rise Climate as well as the launch of our climate infrastructure strategy. More than 200 LPs in our growth, Rise and Rise Climate Funds are actually here with us in San Francisco today and tomorrow, for their respective annual meetings, providing us with a great opportunity to connect in person and discuss our strategies in depth.
Notably, fundraising for our second Rise Climate Fund, which is our largest active campaign is off to a very strong start with high levels of investor interest and engagement. We expect a substantial re-upgrade among our current clients as well as new strategic partnerships, driving us toward a sizable first close in the third quarter. Additionally, in 2024, we expect fundraising for TPG AG credit to exceed $10 billion, more than doubling the capital raised by the platform last year. As Jon mentioned, we’re seeing strong interest from some of our largest LPs in engaging with us about our credit strategies, and we’re excited to share more with you in the coming quarters. To wrap up, we have significant growth opportunity ahead of us across all of our businesses.
Our existing portfolio continues to deliver strong performance, and we’re well positioned with substantial dry powder to deploy into an increasingly active market. We’ve been successfully scaling our existing businesses and investing into a number of growth initiatives that will contribute meaningfully to our business and build shareholder value over time. Now I’ll turn the call back to the operator to take your questions.
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