Hurt in Crisis, TPG Pursues Smaller Deals

Largest TPG-Backed Leveraged Buyouts

VALUE, IN BILLIONS TARGET BUYER INVESTORS ANNOUNCED

Source: Thomson Reuters
$44.4	TXU Corp	TXU Corp SPV	Morgan Stanley; Citigroup; Lehman Brothers Holdings; Kohlberg Kravis Roberts; Texas Pacific Group and Goldman Sachs	Feb. ’07
27.6	Harrah’s Entertainment	Investor Group	Texas Pacific Group and Apollo Management	Oct. ’06
27.3	Alltel Corp	Atlantis Holdings	TPG Capital and GS Capital Partners	May ’07
17.4	Freescale Semiconductor	Firestone Holdings	Texas Pacific Group; Blackstone Group; Permira Beteiligungsberatung and The Carlyle Group	Sept. ’06
13.4	Univision Communications	Umbrella Holdings	Saban Capital Group; Madison Dearborn Capital; Providence Equity Partners; Texas Pacific Group and Thomas H Lee	June ’06
10.8	SunGard Data Systems	Investor Group	Silver Lake Management; Bain Capital; Blackstone Group; GS Capital Partners; Kohlberg Kravis Roberts; Providence Equity Partners and Texas Pacific Group	Mar. ’05
9.4	Biomet	LVB Acquisition	GS Capital Partners; Blackstone Group; Kohlberg Kravis Roberts and Texas Pacific Group	Dec. ’06
7.2	Avaya	Sierra Merger	Silver Lake Management and TPG Capital	June ‘ 07

When the financial crisis erupted in 2008, TPG suffered more than most private equity firms, having invested in three of that era’s most troubled deals.

Now, with stock markets performing well and mergers back in vogue, TPG is coming back, largely with much smaller deals and a recalibrated approach to private equity.

The experience of the 22-year-old private equity stalwart offers a window into how private equity firms are now seeking to become more nimble.

Private equity firms, whose industry grew up in the 1980s, typically raise money from large investors, like public pension funds and university endowments, and use that cash â€" with a fair amount of borrowed money, or leverage â€" to buy entire companies.

For TPG, which still has several soured deals from the pre-crisis era in its portfolio, including huge losses on a troubled energy utility, the new approach involves moving beyond the gigantic acquisitions. Instead, it is looking more at buying minority stakes â€" common in the world of venture capital but rarer in the realm of buyout titans.

None of TPG’s transactions since the financial crisis have topped the $5.2 billion that TPG and two partners spent in 2009 for IMS Health, which on Monday disclosed more information about its coming initial public offering.

The two most prominent deals that TPG has made or is poised to make of late are relatively small: It co-led a $285 million investment in the car ride start-up Uber and is in talks to lead a huge investment in Airbnb.

Its big rivals, including the Blackstone Group and Kohlberg Kravis Roberts, have gone public in recent years, but TPG has remained privately held. Internally, TPG executives draw a comparison to Goldman Sachs, which was the last of the big investment banks to go public, and say they are keeping a close eye on the successes and failures of their publicly traded rivals.

As it considers an eventual initial public offering, TPG is also taking stock of its own battle scars. In conversations with investors in its funds, it is already portraying itself as a wiser firm than it was during the heady days before the crisis.

“We have returned to what private equity does well, after a period of time when the industry did a lot of large deals with mixed results,” James Coulter, a co-founder of TPG, said in a meeting this year with the Oregon Investment Council, which sets investment policy for the Oregon Public Employees Retirement Fund. “We’ve stayed away from consortiums, public-to-privates and some of the things that have been hot in the marketplace.”

TPG is making that pitch as it raises about $2 billion for a new fund to connect its current buyout fund to its next one, which it may begin raising by the end of this year. The Oregon pension fund committed $700 million to the interim fund, and the Washington State Investment Board subsequently committed $600 million.

But Mr. Coulter, with David Bonderman, 71, TPG’s co-founder, faced tough questions from the Oregon council about the firm’s past stumbles.

Perhaps the biggest soured investment is the Texas energy company TXU, which the firm, with Kohlberg Kravis Roberts and Goldman Sachs, bought for $45 billion in 2007. Hailed at the time as the biggest leveraged buyout in history, the deal soon inspired superlatives of a different kind, as the company sank under the weight of a huge debt load and squabbling among creditors.

The utility, now known as Energy Future Holdings, is poised to file for bankruptcy protection in the next few weeks, according to people briefed on the matter. Unless its many creditors can come to an agreement on how to reorganize the company under Chapter 11, the case is likely to be among the costliest and most raucous bankruptcies on record.

TPG and its partners, who bought the company as a bet on rising natural gas prices, are likely to recover little, if anything, in the bankruptcy filing.

Another investment, Caesars Entertainment, a giant casino operator that TPG bought in 2006 with Apollo Global Management and that subsequently struggled in the economic recession under a mountain of debt, is still in the red.

TPG’s portion of the investment, which more than doubled in value last year in a soaring stock market, has now produced a negative 13 percent internal rate of return, according to a year-end letter sent to investors.

And there was Washington Mutual. TPG led a group of investors in extending a $7 billion lifeline to the struggling bank in the spring of 2008. Just months later, the government seized WaMu, and TPG lost every penny.

Those losses have weighed on TPG. The firm’s fifth buyout fund, which includes investments in Energy Future Holdings and Caesars, showed a net internal rate of return of 1.18 percent as of Sept. 30, according to the Washington State Investment Board, an investor in the fund. By comparison, the average performance of similar funds was 6.97 percent, according to the consulting firm Cambridge Associates.

“In the bleakest, darkest moment, a lot of institutional investors and private equity managers said there’s got to be something else,” said Andrea Auerbach, the head of the United States private equity research team at Cambridge Associates. “Growth equity, or minority investments in growing companies or sectors that are growing faster than the overall economy, it’s become mainstream.”

TPG’s buyout side has stayed busy. On Friday, it announced a deal to acquire a warranty insurance company for $1.5 billion. And within two weeks the firm will sell more than eight million shares of the prescription data provider IMS Health in an I.P.O. If IMS sells its stock at the high end of its expected range, $21 a share, TPG stands to collect as much as $300 million by selling part of its stake.

But TPG’s most prominent deal activity of late lies far away from the world of traditional leveraged buyouts. Instead, its growth-capital arm has been involved in sometimes unusual investments in fast-growing start-ups.

Last summer, TPG Growth united with Google’s venture capital division to pour $258 million into Uber, the car service, and Mr. Bonderman joined the start-up’s board. The round valued Uber at $3.5 billion, making it one of the more valuable elite start-ups. More intriguingly, TPG Growth is in talks to raise more than $400 million for Airbnb in a round that would value the home-sharing company at an astonishing $10 billion, people briefed on the matter have said, making it worth more than the 57-year-old Hyatt hotel chain.

Neither investment is a sure bet. Uber and Airbnb face many legal obstacles from local governments and other regulators skeptical of their business models. Those hurdles appear unlikely to faze TPG, which is no stranger to investing in companies facing potential government action. In any event, TPG appears to think it can perform better by sticking with smaller transactions. In a sign of its scaled-down ambitions, its coming buyout fund is expected to be no larger than $12 billion, compared with the $19 billion fund it previously raised in 2008.

“In investing, you will from time to time make mistakes,” Mr. Coulter said in the meeting with the Oregon Investment Council. “But the most important thing to do is learn from the mistakes.”