Breakingviews: TPG listing caps 30 years of easy money

The buyout business has come a long way since David Bonderman and James Coulter founded TPG in 1992. The company, which priced its initial public offering on Wednesday, and peers like Blackstone and Apollo Global Management have seen assets grow tremendously. But a main propellant of private equity – a declining trend in interest rates – has been constant. That is set to change, and TPG needs to change, too.

TPG’s deal priced at $29.50 a share, the midpoint of its anticipated range, valuing the firm’s equity at $9.1 billion, equivalent to roughly 8% of its $109 billion in assets under management. That’s about in line with Apollo and Carlyle, both of which listed shares several years ago, but not as rich as larger Blackstone and KKR.

The firm, now run by ex-Goldmanite Jon Winkelried, raised a total of $1 billion from investors in its IPO. About 40% of its net spoils will go towards buying out certain stakeholders. The rest will give the business ammunition to expand.

TPG has focused on its bread and butter. Its prospectus boasts that its funds own 280 companies in 30 countries which employ more than half a million people. Low interest rates are a driving force for that business, because cheap and plentiful debt makes leveraged buyouts easier. The U.S. federal funds overnight rate has broadly declined from nearly 10% in the late 1980s to near zero in recent years.

Bonderman’s firm has clocked average annual returns of around 15% for fund investors, net of fees. That has looked favorable enough against other options, like public stocks, for private equity to become a staple holding for pension funds and endowments.

Competitors have used the currency of public shares to diversify. Carlyle now has just around 40% of its assets in private equity, Blackstone a third, and Apollo one-tenth. Investing in debt is a big business for some of TPG’s rivals. KKR and Apollo bought or built insurance businesses, giving them permanent capital that enables them to spend less time on the fundraising treadmill.

The Federal Reserve is likely to start raising interest rates soon to tackle inflation, which hit 7% year-on-year in December, the highest in 40 years. That could dent leveraged buyouts after three decades of easy money. TPG, with around 80% of assets still in private equity, needs to reinvent itself.

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