TPG Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 13, 2024

There are 8 speakers on the call.

Operator

Good morning, and welcome to the TPG's 4th Quarter and Full Year 2023 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. Please be advised that today's call is being recorded. Please go to TPG's IR website to obtain the earnings materials.

Operator

I will now turn the call over to Gary Stein, Head of Investor Relations at TPG. Thank you. You may begin.

Speaker 1

Great. Thanks, operator, and welcome, everyone. Joining me this morning are John Winkelried, Chief Executive Officer and Jack Weingart, Chief Financial Officer. In addition, our Executive Chairman and Co Founder, Jim Coulter and our President, Todd Sysitsky, will be available for the Q and 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.

Speaker 1

Please refer to TPG's earnings release and SEC filings for factors could cause actual results to differ materially from these statements. EPG undertakes no obligation to revise or update forward looking statements except as required by law. Within our discussion and earnings release, we're presenting GAAP and non GAAP measures reflecting the close of the Angelo Gordon transaction on November 1, 2023. We also present pro form a GAAP and non GAAP measures that assume the transaction closed on January 1, 2023. Please refer to TPG's earnings release for details on the pro form a financial information.

Speaker 1

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 website. Please note that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase and interest in any TPG Looking briefly at our results for the Q4, we reported GAAP net income attributable to TPG Inc. Of $13,000,000 at after tax distributable earnings of $206,000,000 or $0.51 per share of Class A common stock. We declared a dividend of $0.44 per share of Class A common stock, which will be paid on March 8th to holders of record as of February 23rd.

Speaker 1

With that, I'll turn the call over to John.

Speaker 2

Thanks, Gary. Good morning, everyone. 2023 was a transformative year for DPG, and I'll begin today by sharing several updates on our progress. On last February's earnings call, We laid out growth agenda for the year that included 3 key components. 1st, scaling our existing strategies and in particular completing several important fundraisers.

Speaker 2

2nd, continuing our strong track record of driving organic growth and innovation and third, expanding our business through targeted We're excited about the progress we've made in all three of these areas. Looking at our business today, we managed more than $220,000,000,000 across private equity, credit and real estate, and we furthered our position as a scaled differentiated investment firm. I'll review a few highlights from the past year and also discuss our outlook. 1st, as it relates to existing strategies, we have completed the fundraisers for the next generation of our Health Care Partners and RISE Funds. We have grown our fund sizes vintage over vintage across each of these campaigns, which is a significant accomplishment given the persistent industry headwinds in private equity fundraising.

Speaker 2

This is a direct result of TPG's differentiated investment strategies, outstanding performance track record and strong and growing client relationships. Specifically for TPG Capital 9 and Healthcare Partners 2, We held our final close with $15,600,000,000 of aggregate commitments, up 10% from the prior vintage. And for Rise 3, we closed on $2,700,000,000 up 24%. In addition to expanding our existing relationships, we also added many new clients to TPG from around the world with notable progress in the Middle East and Asia. We believe these new client relationships create significant potential for embedded growth in successor funds as well as the opportunity to engagement across additional TPG strategies and products.

Speaker 2

For our ongoing Capital Asia campaign, we have raised $4,300,000,000 of capital as of year end and will hold a final close in the coming months. Our clients continue to express strong interest and we expect the fund to be larger than its predecessor. 2nd, we continue to demonstrate our ability to grow organically by launching and scaling products in parts of the market where we have competitive advantages. I'll highlight a few of these initiatives. Our new real estate credit strategy received more than 7 $50,000,000 of commitments and closed on approximately $650,000,000 in the 4th quarter.

Speaker 2

We are now actively investing And the current market backdrop is one of the most interesting environments we've seen since the early 2000s for real estate credit given the dynamics of higher rates, declining asset values and a significant pullback in commercial real estate lending. Our strategy is purpose built for this part of the cycle and we intend to continue to raise capital in 2024. Turning to climate. At COP 28 this past December, we announced the $1,500,000,000 commitment to the next generation of TPG Rise Climate Private Equity Funds from Alterra, the UAE's $30,000,000,000 climate focused investment manager. This includes a $1,000,000,000 commitment to our 2nd RISE Climate Fund and a $500,000,000 commitment to our new Global South Initiative.

Speaker 2

The UAE's selection of TPG as its first private equity partner is a testament to the strong brand and leadership position We've built in the climate and impact space. Within our climate strategy, we're also preparing to launch our inaugural Climate Transition Infrastructure Fund. And just last week, we announced that Scott Leibowitz will be joining TPG later this year as the Head of Infrastructure for PPGRise Climate. Scott most recently served as a Global Co Head and Co CIO of Infrastructure Investing at Goldman Sachs and we're excited for him to help bring our differentiated strategy to market. Finally, we closed the acquisition of Angelo Gordon in the 4th quarter, meaningfully expanding our capabilities across credit and real estate and further enhancing our presence in Europe and Asia.

Speaker 2

We believe the acquisition of Angelo Gordon will be a significant growth driver for the firm in a number of ways. One key area furthering our penetration in high growth distribution channels such as private wealth and insurance. And so far this year, we have secured new distribution relationships for our direct lending BDC and Credit Solutions Fund with several large wirehouses and private banking partners. We are focused on delivering additional products provide private wealth investors access to our strategies and we look forward to sharing more with you in the future. We also continue to make progress on standing up new revenue and businesses that leverage the combined expertise and capabilities of TPG and AG.

Speaker 2

The most near term is the ability to generate fee revenue from the integration of our Capital Markets business into TPG AG Credit, which is already well underway. Our strategic growth initiatives over the last few years have led to a step function change in our business. Through both organic innovation and the acquisition of AG, expanded the breadth of our franchise across private equity, credit, real estate and soon to be infrastructure. As a result, the cadence and consistency of our capital raising and overall growth profile have fundamentally changed. We will be in the market on a steadier, more consistent basis across both the institutional and private wealth Looking ahead, we expect our growth this year to be driven by 5 primary vectors, including 1, credit fundraising across all our TPG AG strategies 2, the newest vintages of our Growth and Rise Climate Private Equity Funds 3, the launch of our climate transition infrastructure strategy 4, the completion of several first time fundraisers, including real estate credit GP secondaries and 5, new product and channel development.

Speaker 2

Turning to our 4th quarter results. We had a strong year end we had a strong end to the year with $8,800,000,000 of capital raised in the quarter, primarily across the campaigns I discussed earlier. We believe we are well positioned with $51,000,000,000 of dry powder to deploy to what we view as an improving market backdrop. You may remember that during our Q2 'twenty three earnings call, we discussed several factors that were contributing to a ramp up in our transaction pipelines, including narrowing bid ask spreads, greater receptivity among corporates to strategically realign their businesses and GP is increasingly seeking creative solutions for monetizations. These forces have been accelerating and TPG has continued to deploy capital by leveraging our long dated themes and core strengths such as executing corporate carve outs and structuring proprietary creative financing solutions.

Speaker 2

As we look ahead In areas such as real estate, we expect to see more attractive assets for sale this year that would otherwise typically not come to market as companies find themselves under increasing pressure for liquidity. In private equity, given TPG's deep sector focus, commitment to business building and strong track record of structuring win win transactions, we continue to be a partner of choice for companies looking to strategically reposition their businesses and help drive growth. And in credit, as we mentioned during the TPG AG teach in, the opportunity set continues to expand and We expect a significant increase in deployment this year, which will grow our base of fee earning AUM. The origination pipeline is robust across all of our credit platforms as borrowers seek alternatives to public debt financing with greater flexibility to meet their needs. We also expect a more active M and A pipeline as the economy continues to show signs of steadier growth, leading to new origination opportunities.

Speaker 2

Our investment teams have been very busy deploying nearly $12,000,000,000 in the 4th quarter. Deployment picked up significantly across our platforms in the second half of the year and we invested over $22,000,000,000 of capital in 2023. We expect our robust pace of deployment to continue in 2024. Looking briefly at activity within our private equity strategies for Capital Asia, 2023 was a record year for deployment with investments closed in almost every region where we operate. In the Q4 alone, we closed 3 transactions, including a very including a very interesting platform building investment that combines several hospital groups in Southeast Asia.

Speaker 2

This unique transaction led by our portfolio company, Columbia Asia, creates one of the largest hospital ecosystems in Southeast Asia and aligns with our thematic focus on building regional platforms of scale with high strategic value. In our growth platform, we expect to see greater deployment across both our growth and tech adjacencies funds in 2024 as companies address pressing needs for primary capital as well as pressure for secondary liquidity. We raised $1,100,000,000 of capital for our 6th Growth Fund during the rolling first close in the quarter and activated the fund. Our impact platform has remained extremely active with strong investment pace across both our RISE and RISE Climate Funds. Our FirstRise Climate Fund is now approximately 75% invested and reserved across diverse portfolio of 21 companies that grew revenue nearly 30% in 2023.

Speaker 2

Additionally, our 2 IPOs last year, NexTracker Toptog Technologies have both traded up more than 100% from their respective IPO offer prices, and we recently monetized a portion of our ownership in NEXTracker. We are well positioned with strong momentum as we prepare to launch our 2nd Climate private equity fund and new climate transition infrastructure strategy. Turning to our credit strategies. Our middle market direct lending platform, TBG Twinbrook, has maintained its strong performance through its sector driven strategy and disciplined approach in providing loans at the top of the capital structure with robust covenant protections. Despite the volatile market backdrop during 2023, Twinbrook had no realized credit losses and deployed nearly $3,000,000,000 of capital on a pro form a basis into more than 30 new companies and over 260 add on investments to existing borrowers.

Speaker 2

Our corporate credit strategy Credit Solutions continued to perform well during the quarter and this contributed to its excellent full year results. In 2023, both the U. S. High yield and leveraged loan indices were up over 13 and each of our active credit solutions funds outperformed these indices by several 100 basis points. In terms of Activity Credit Solutions invested more than $1,200,000,000 in the 4th quarter, notably in a number of bespoke, privately structured financing transactions and deployed nearly $2,700,000,000 of capital in 2023, both on a pro form a basis.

Speaker 2

In addition, our housing business originated financing projects during the year with more than $4,000,000,000 of aggregate land and site development costs. Turning to asset based lending and specialty finance. These strategies have become an increasingly important part of the private credit ecosystem. Clients are looking to diversify underlying cash flows away from corporate EBITDA and shift fixed income allocations to private structured credit opportunities. In addition, public securitized credit continues to trade with an attractive excess spread relative to corporate credit.

Speaker 2

Finally, last year's regional banking crisis further enhanced both the investment opportunity set and client interest in the space. As a result of and traditional structured credit providers, we have already deployed more than 60% of TPG AG's inaugural asset based private credit fund in more than 30 transactions, and we expect to scale this strategy over time. And in real estate, we continue to see compelling opportunities to acquire assets from sellers in need of capital in need of solutions capital. For example, in the Q4, our TREP fund acquired a majority interest in 2 Class A industrial business parks in the Greater Toronto area, which we view as one of the best performing industrial markets North America with a sub-two percent vacancy rate and high barriers to entry. Additionally, TPG AG Real Estate had 7 $300,000,000 of dry powder at year end.

Speaker 2

With dedicated funds in the U. S, Europe and Asia and a global network of approximately 200 operating partners, Keepaghi Real Estate is well positioned to deploy its flexible and opportunistic capital across a range of attractive opportunities.

Speaker 3

Finally, I want to

Speaker 2

highlight PPG Next, which completed its inaugural investment this quarter in the Visualize Group, a new investment manager. PBT will serve as a significant anchor investor and visualizes private equity strategy and will provide the firm with institutional resources to support business building and scale. This strategic partnership is a strong example of our commitment to augmenting diverse leadership within our industry and we look forward to continuing to seed high potential investment managers. Although we remain cautious due to an uncertain macro environment characterized by increasing valuations, anticipation of Fed policy decisions and significant geopolitical tensions, 2024 is off to a very active start for TPG. G, we have a robust pipeline of interesting investment opportunities.

Speaker 2

We are engaged in high quality dialogue with many existing and new clients and we see a number of levers to drive further growth and innovation across our business. We have a lot of work to do this year, but I'm confident in our ability to continue to deliver for our clients and build long term value for our shareholders. Now I'll turn it over to Jack to review our financial results.

Speaker 4

Thank you, John. As Gary mentioned earlier, I'll be discussing our results today on an actual basis, which include 2 months of TPG Angela Gordon from the acquisition close date of November 1 through December 31. In our earnings release, we've also provided pro form a financials for the Q4 and full year 2020 3, which assume the transaction closed on January 1, 2023. We ended the year with $222,000,000,000 of total assets management up 64% year over year. This was driven by $75,000,000,000 of acquired AUM, dollars 16,000,000,000 of capital raised and value creation of $7,000,000,000 partially offset by $10,000,000,000 of realizations and $1,000,000,000 of outflows over the last 12 months.

Speaker 4

As John mentioned, we had a strong quarter for fundraising due to the final closes across our capital and RISE funds, as well as the rolling first close of our growth fund. Fee earning AUM increased 76% year over year to $137,000,000,000 And we had more than $51,000,000,000 of dry powder available to deploy, representing 38% of fee earning AUM. We also had AUM subject to fee earning growth of $24,000,000,000 at the end of the year, of which $14,000,000,000 was not yet earning This represents a significant embedded growth driver of potential management fee growth as we deploy this capital, particularly across our credit vehicles. Fee related revenue was $465,000,000 in the quarter, up 45% sequentially and 51% year over year and $1,300,000,000 for the year, up 23% from 2022. Management fees totaled $396,000,000 in the quarter and grew 42% sequentially due in part to the inclusion of TPG AG in our results as well as substantial catch up fees related Final closes for the capital and RISE funds.

Speaker 4

Transaction fees increased 79% sequentially and 20% year over year to $55,000,000 in Q4, a record level and totaled $108,000,000 for the full year. Our 4th quarter transaction fees were elevated by the closing of several large transactions where TPG was the sole or lead arranger for the debt financing. As John noted, over time, we expect to drive growth in transaction fee revenues as we expand our broker dealer capabilities to TPG AG. However, Q1 is often a seasonally light quarter for deal closings as we saw last year, and we expect that to be the case again this year. Fee related earnings were $226,000,000 for the 4th quarter, up 45% sequentially and 62% year over year and 606,000,000 for 2023, up 34% from 2022.

Speaker 4

Our FRE margin was 49% for the 4th quarter and 45% for the last 12 months, a 3 50 basis point improvement from 2022. On a pro form a basis, Assuming the AG acquisition closed on January 1, our FRE margin would have been 47% for the 4th quarter 40% for the full year. It's important to note that these pro form a margins were elevated by the significant catch up fees and transaction revenues in the 4th quarter. As we've discussed previously, our normalized margin has blended down through the inclusion of TPG AG and we now have a meaningful opportunity to drive profitable growth through margin expansion. We expect our FRE margin to exceed 40% for the year in 2020 as we realize operating leverage and synergies from the integration and scaling of our business, while also investing in growth initiatives that we've described.

Speaker 4

We will continue to maintain strong expense discipline and over the longer term, we expect our margin to scale back up to and exceed 45 percent. After tax distributable earnings for the 4th quarter were $206,000,000 or $0.51 per share of Class A common stock, including $1,000,000 from realized performance allocations. Our realization activity last year reflected our bias in a volatile market to focus on building value in our relatively young and we remained selective in our exit activity. That being said, as markets have begun to normalize, Our pipeline of potential monetizations has increased. Assuming markets remain supportive, we expect realized performance allocations to increase in 2024.

Speaker 4

In the Q4, we also incurred $18,000,000 of non core expenses related to the closing of the Angelo Gordon acquisition, which is included in our realized investment income and other line item. While we will continue to incur ongoing costs, we expect this to normalize now the transaction is closed. Turning to our non GAAP balance sheet. We used a portion of our cash and revolver capacity to fund the closing of the AG transaction in the 4th quarter. Ended the year with $105,000,000 of cash and cash equivalents, approximately $500,000,000 drawn on our revolver and $450,000,000 of other long term debt.

Speaker 4

As I've mentioned previously, we upsized our revolver from $700,000,000 to $1,200,000,000 last September and currently have approximately $700,000,000 of undrawn capacity. Our balance sheet post closing remains conservative with moderate leverage and ample liquidity. Our net accrued performance at the end of the year was $891,000,000 compared to $692,000,000 in the 3rd quarter. This 29% increase driven by $141,000,000 of accrued carry attributable to TPG AG at the acquisition date and a $77,000,000 increase in the value of our investments, particularly partially offset by $19,000,000 in realized gains. While our operating model is FRE centric, we have significant embedded performance related earnings potential, and we expect our financial results will benefit from the eventual pickup in realizations.

Speaker 4

At the end of the year, our performance eligible AUM totaled $192,000,000,000 or 87% of our total AUM, of which $151,000,000,000 was performance fee generating. Our portfolio has continued to demonstrate resilience through a period of high volatility, underpinned by our deep sector expertise and careful investment selection in assets with strong growth and durable margins. Our private equity portfolio, which includes our capital, growth and impact platforms, appreciated approximately 4% in the quarter and 9% over the last 12 months. In aggregate, our portfolio companies grew revenue by more than 20% over the last 12 months. The operating environment is normalizing Our portfolio continues to demonstrate strong cost management and stable margins.

Speaker 4

TPG AG's Credits appreciation of 4% in the quarter and 14% in 2023 on a pro form a basis was driven by strong credit selection and a low annualized loss ratio across the portfolio. Our strategies also benefited from the broad credit market rally heading into the end of the year. In real estate, the performance of our portfolios reflects the broader challenges in the sector resulting from higher rates, although the fundamentals across our underlying core sectors and assets remain strong. Looking forward, I'll reiterate the guidance

Speaker 2

that we provided at

Speaker 3

our teach in in November.

Speaker 4

We expect our total private equity and infrastructure capital raised in 20 24 to grow compared to 2023, driven by the fundraisers for growth and rise climate as well as the launch of our Climate Transition Infrastructure Strategy. Additionally, in 2024, we expect fundraising for TPG AG Credit to exceed $10,000,000,000 more than doubling the capital raised by the platform in 2023 on a pro form a basis. On credit deployment, as John indicated, we expect a significant increase in each of our core strategies this year, which will grow our base of fee earning AUM. Stepping back, we're excited about the progress we've made over the past 2 years in executing against our strategic priorities. We've scaled and diversified our business while maintaining a strong focus on delivering excellent returns for our clients.

Speaker 4

Looking forward, we're equally excited about our path ahead. We have great visibility into the next phase of our growth with multiple levers to expand our asset base and drive revenue growth and operating leverage. We're confident in our ability to continue delivering differentiated performance for our clients and long term value for our shareholders. Now I'll turn the call back to the operator to take your questions.

Operator

We'll take our first question from Alex Blostein with Goldman Sachs.

Speaker 5

Hi, good morning everybody. Thank you for the question. My first question is around credit. All data has got 2 quick parts to it. So the first is, hear you on the expectations for accelerating fundraising and I think you reiterated over the $10,000,000,000 number that you talked about previously.

Speaker 5

Can you just spend a minute on what that comprised of in terms of the key strategies, but also how much of that growth is sort of like embedded legacy AG relationships or you're also incorporating some of the incremental cross selling opportunities that we talked about between AG and TPG? And then on the deployment side, and that's the second question here, I was just curious within the $132,000,000 of sort of shadow fees, how much of that is related to credit?

Speaker 2

Thanks, Alex. I'll start and then on the last part of it, We'll see if we dig that out. But if not, we'll follow-up with you. But 1st of all, on the capital formation side, I think that we expect a healthy mix between Capital formation from existing relationships that the AG Credit team currently has. And we're actively involved in those dialogues really across the strategies.

Speaker 2

We also expect that, as we talked about before, Given the lack of overlap in the LP base of both TPG and AG that there continues to be an exceptional opportunity for us to expand the breadth of capital formation to relationships that TPG has that AG is being introduced to Allyn, I think you and I have talked about this before, but we're spending a lot of time, even since the prior to But certainly post close, we're spending a lot of time with our capital formation team focused on expanding the breadth of those relationships on the credit side, and we feel like we're making good progress. So, I'd expect that when we finish good progress. So I'd expect that when we finish this year that we'll have a nice broadening and deepening of AG Credit's relationships that will contribute to that and also form the base for future growth in those strategies. We're also in the market. I think I mentioned in my comments, we're also in the market with and in process of a number of vehicles for QPG AG Credit, that will be raising capital in the wealth channel.

Speaker 2

And that will be a continued focus of ours in terms of expanding the access and reach in the wealth channel and creating multiple vehicles for each of these strategies so that the capital raising also becomes more of an ongoing capability as we expand that reach. And I think I mentioned we have a number channel partners that have already started that process with us. So I'd expect to see and further penetration there as well, given this the increase in the brand recognition with TPG AG together, as well as frankly the track record, that they've created as a result of the investing activity. So expect to see that as well. And I think that as I said, we're in the market with all of our credit strategies.

Speaker 2

And so expect that the growth in Fundraising will occur. It's hard for me to say exactly how it will break down between the 3 different pillars of our credit strategies, but the growth will occur across all three.

Speaker 4

Alex, this is Jack. On your question about the $132,000,000 of estimated annual fee opportunity from both AUM not yet earning fees and subject fee step up, that's weighted toward The AUM not yet earning fees as you'd expect, probably $100,000,000 of that is in ag bucket and $30,000,000 or so is in the fee step up category. And within the AUM not yet earning fees, the biggest components would be across AG's credit real estate businesses, probably half of that, call it $50,000,000 of the 100 and the remainder kind of weighted toward TPG's growth and real estate platforms. And in the FAUM subject to step up that $30,000,000 the biggest components of that would be in the capital platform. Can you remember we had the J curve mitigant structure in some of our capital that steps up as we invest capital?

Speaker 4

And about $10,000,000 is in the AG Real Estate business.

Speaker 5

Great. Thank you both.

Operator

The next question comes from Ken Worthington with JPMorgan. Hi.

Speaker 5

Ken? You've gone through a more aggressive realization phase prior to the IPO. Ken,

Speaker 2

you broke your first part of your question broke up and couldn't hear you. Can you start again?

Speaker 5

Yes, I apologize. As we think about net accrued carry, you've called out a number of times that you went through a more aggressive realization phase prior to the IPO. But if we looked at the accrued carry today by vintage, 80% is older than 5 years and it would seem like realizations should be front end loaded. How do we think about 2024 from a realization perspective if the Market environment remains benign. And can you remind us how the European Waterfall structure and the Angelo Gordon Funds should reasonably play out over the next few years?

Speaker 3

Todd, do you want to comment on

Speaker 2

realizations on the private equity side first?

Speaker 3

Yes. Let me I'll start on that. This is certainly an area, we spend a lot of time focusing on as a partner group. Is important to our good fund management. And we spent the last few years really investing in our companies and we have some very Well performing companies, I think, should be in a good position to realize value in the year and years ahead.

Speaker 3

It is, I think, worth noting we've had some important Successes in recent quarters. I think we mentioned the sale of CAA in the second half of last year, which was a strong exit. That was again to your point about duration. That was a 13 year partnership and we waited and really picked our spot. We also had actually an important realization in recent weeks.

Speaker 3

We sold sizable block of shares in NEXTracker, which is a company went public in their Q1 of 'twenty three, is about 130% from its IPO price. One more example just of how we really are able to pick our spots, particularly on the private equity side. Over the last 2 years, we launched 7 IPOs in India, and all the positions that we still hold are trading well above their IPO offer price. And of course, IPOs are leading indicators of liquidity. So some opportunities there.

Speaker 3

So there have been important recent successes. But overall, To your the start of your question, we've been selective and we've really been building value in the portfolio after a very big cycle of realizations in 2021, 2022. As far as the go forward, we're very focused on driving liquidity as a firm. And as the market recovers, We are actively managing the drivers of liquidity as a partner group in each business unit. And with the growing momentum in the overall deal market and the strength of these portfolio companies, do feel like there's going to be an increasing number of opportunities to drive liquidity this year.

Speaker 5

Okay, great. Thank you.

Operator

The next question comes from Michael Cyprys with Morgan Stanley.

Speaker 5

Hi, good morning. Thanks for taking the question. Just wanted to come back to the Private Wealth opportunity. I was hoping you could maybe elaborate on the Positioning now that you guys have within the private wealth marketplace, maybe talk to some of the products that you have. I think you alluded to some new products to the marketplace as well.

Speaker 5

How are you thinking about that? What sort of traction are you seeing on the existing products in the marketplace? Maybe talk to some of the steps that you're looking to take here in 24. Thank you.

Speaker 2

Yes. Well, I think we've been actively engaged in dialogue with a number of channel partners. And I think, Mike, you know that prior to the AG acquisition, raising some capital through our private equity and real estate strategies through those channel partners was a routine part of what we were doing, on essentially campaign by campaign. The relationship dialogue now is taking a completely sort of different step function. It's like a step function change because With the expansion of our strategies as a result of the AG acquisition and the ability to offer more continuously offered vehicles such as BDCs, etcetera, that and the pre existing dialogue that AG had with a number of channel partners, We've come together now and we've been having a series of really kind of strategic dialogue with our channel partners about a more holistic approach to how we're approaching that channel.

Speaker 2

And I've actually had several of those meetings myself over the course of the last month or so. And what I would say to you is that there is a very strong appetite from the Wealth Channel Partners in having a more holistic product offering from TPG. There's a strong desire in the channel. I mean, you obviously know what the data looks like yourself in terms of the available capacity in the wealth channel wanting to allocate to various strategies. And we're seeing strong demand for having some level of diversification in brands that are driving product through the channel.

Speaker 2

And So as a result of that, I would say that we're very encouraged by what we're hearing from those channel partners and

Speaker 5

we're actively deploying into those opportunities. If you

Speaker 2

look at our resource here, going into those opportunities. If you look at our resource here, our resource as a result of the combined two firms more than doubled In terms of our team that's focused on the penetration of the channel, product creation, product structuring as well as essentially feet on the street from a marketing and relationship management point of view. And so that's been a noticeable step function change for us. So we have products that are up in the channel and will continue to be across Our direct lending business for Twinbrook, we have products that are up on the channel for our structured credit business. And besides obviously some of our private equity strategies that we're also going to offer through the channel.

Speaker 2

So it's now looking like a complete menu of product capabilities. I should have mentioned also including our real estate capability as well. So it's now looking like a complete menu. And our brand is a very strong brand and it's gaining more and more traction in the channel as we continue to put resources behind it. So we're feeling pretty good about what we expect to do in the wealth channels over time.

Speaker 2

And I think it will and we've said I think over the course of the last 2 years, we've talked about it, our objective for strengthening our base there and also having become a larger part of our sourcing of capital, and we're on a path to do that.

Speaker 5

Great. Thank you.

Operator

The next question comes from Craig Siegenthaler with Bank of America.

Speaker 5

Hey, good morning everyone. This is Chris. So for my question, I wanted to hit on the FRE margin target. Your 47% pro form a FRE margin already beat your 45% long term target, although I think this was driven by catch up fees and transaction fees. And then starting 'twenty Angela Gordon initially will weigh on the margin, but this will reverse as you realize cost synergy.

Speaker 5

So As you pull all this together, isn't your 40% 202445 percent long term targets too conservative or is this also implying a healthy level investing?

Speaker 4

Thanks, Greg, for the question. We think it's the right target for us to be articulating at this point. I think you mentioned some of the key drivers. The 4th quarter margins, as I mentioned in my comments, were elevated by the catch up fees. They also benefited from above expected core fundraising, but also strong transaction fees.

Speaker 4

So some of those will not reoccur in 2024. Think about the fundraising waves we're in the middle of over a longer arc, right? We just completed the large flagship private equity fundraisers. Those had some natural elevated catch up fees toward the end of them. Now we're entering the market with some big new flagships like the new private equity fund in Climate, The infrastructure funding climate, the new growth fund, those will likely complete in 2025.

Speaker 4

As you get toward the end of campaigns, You'll see some more catch up fees kick in, in 'twenty five in connection with those funds. So when you and on your cost synergy point, We mentioned at the Analyst Day that we had achieved $9,000,000 of cost synergies. We also said consistently that this Transaction is much more about growth and diversification and investing and growing our platform over the years and not really about dropping cost synergies to the bottom line. We are finding additional cost synergies above the 9 our intention is to reinvest those in long term growth. So when we take all that into account, we think the margins we're targeting for this year are appropriate.

Speaker 4

And longer term, we certainly will be scaling our businesses and generating operating leverage.

Speaker 5

Thanks, Jack.

Operator

The next question comes from Mike Brown with KBW.

Speaker 5

Great. Good morning. Wanted to start with the insurance opportunity. I guess it's Few months since the closing, I just wanted to see if there was any update on the opportunity there in terms of The opportunities you've been looking at from strategic partners. And then when you think about the broader platform now, You've got full diversification across a lot of the major product lines.

Speaker 5

But is there any element of the credit business that you think you want to continue to bolster and build out to really fully service the insurance balance sheets? Thank you.

Speaker 2

Sure. Yes, it's a good question because it's very much something that we're focused on and we've been focused on. Let me just say that the just reiterate that the insurance opportunity, I think, is both is sort of there's 2 categories of opportunity. 1 is We currently have a number of insurance companies that are clients of ours across a range of our products. So think of the insurance sector as also a source of LP penetration And that exists here to date on both sides of the firm, both across all of our strategies.

Speaker 2

And I think With the expansion of our general product capabilities, I think we are able to have a dialogue with insurance companies that's a bit more holistic and we're already seeing the benefits of that. And we have a dedicated team covering the insurance sector as LPs with the embedded knowledge of what's important to insurance companies in terms of their asset selection process. So that, I would say, is one part of it that continues to grow and continues to be a great opportunity for us. And it's also a global opportunity. Secondly, on the strategic side, obviously, we've talked about this before.

Speaker 2

With our expansion into across the range of asset classes, the opportunity to have a more strategic dialogue with a number of insurance companies is clearly there. It's front and center for us. And I would say that Since the announcement of the acquisition of Angela Gordon, that dialogue has picked up quite meaningfully. And so we're doing a lot of work on it. I would say we're evaluating opportunities.

Speaker 2

And of course, we'll be very selective and careful in terms of what we ultimately do, so that we position ourselves in the most strategic way we can. And as far as the product lines, particularly on the credit side, We feel great about the mix of product capability that we have in AGM. One of the things that attracted us to Angelo Gordon was that it was multi strategy platform. It wasn't a monoline that, for instance, was only doing direct lending. It was a multi strategy platform, So it had a direct lending capability, it has a credit solutions capability, and it has a structured credit capability.

Speaker 2

And in particular, I would say one of the things that is very important in the process of managing assets on behalf of insurance companies is making sure that you have product structuring capabilities, whether it's creating rated note structures, risk tranching and asset sourcing capabilities outside of just pure essentially EBITDA risk, Outside of purely the corporate side, you've got to also be able to reach and source product on the non EBITDA side. So our structured credit business in terms of asset based finance, specialty finance,

Speaker 5

mortgage product

Speaker 2

across the whole range of those products. We have a business that's been built out over the last 15 years that has infrastructure, servicing capability, and product reps. So, now We'll never be done building those businesses. We'll continue to build those businesses and expand them as we're able to scale them with respect to more capital. But we feel pretty good about the tools that we have.

Speaker 2

So that's how we feel we're positioned right now.

Operator

The next question comes from Brian McKenna with Citizens JMP.

Speaker 5

Great. Thanks. So performance in RISE Climate is pretty impressive today with an IRR of 27%. It will be great just to get some color on really what's driving this outperformance. And then with the next ride climate and infrastructure funds coming down the pike, Mark, what are your initial base case expectations for performance for these strategies?

Speaker 4

Jim, I think

Speaker 2

you're on.

Speaker 6

Sure. Thanks for the questions and greetings from Geneva where I'm on about the 10th city of The RISE climate launch, so I'm well positioned to answer those questions. I'd say the outperformance last year was really a Being in the right place ahead of the wave, we started the decarbonization investment journey almost 7 years ago. And as a result, I think we put ourselves in a position to lead the market in terms of deployment and opportunity creation. Last year, I think the value creation for the fund was up 37%, which is obviously a standout in private equity.

Speaker 6

But in particular, we were able to execute 2 very important IPOs in the market where IPOs were Certainly rare and that's because I think that the public market is ready for the next generation of climate forward companies. So this fund is a fund that so far in a world where little has happened as expected in private equity. It's been invested in exactly the 3 years that we told the market to be invested. It's in 20 plus companies, well diversified and so far the performance I think as you point out has been strong. Going forward, we continue to think we're well positioned to show the market differentiated opportunities we should be able to continue to generate the private equity target returns that we've been focused on in this fund.

Speaker 6

In the infrastructure world, I think you continue to see a fair amount of interest in decarbonization and our position Essentially expanding from private equity into the infrastructure adjacency offers

Speaker 5

and I

Speaker 6

think that's significant opportunity for us. So this is a period of time that investors are looking for sector differentiation and I think we're in a good position to continue to offer it in the last

Speaker 4

And Brian, in terms of fundraising targets for the business, if that's what you're referring to, we did say publicly When the commitment was announced that we were targeting at least $10,000,000,000 across our next private equity fund, TRC II, combined with the Global South Initiative. So those numbers do not include the infrastructure business. That won't all be raised this year. It will be raised over this year and next year. And assume that those funds will be activated more toward the end of the year.

Speaker 5

Great. Thanks, Jack.

Operator

The next question comes from Luke Mason with BNP Paribas.

Speaker 5

Great. Thanks for taking my question. It's just on transaction fees, you talked about pipelines picking up, but Q1 seasonally weaker. And you integrate in AG there. So I'm just wondering how we should think about the potential growth in kind of capital markets transaction fee revenue in the coming years if we assume more benign markets?

Speaker 5

Thank you.

Speaker 4

Good question, Lou. If you separate that into kind of the legacy TPG businesses and the capital markets business we're building here And then think about adding capital markets fees through the integration of AG, particularly on the credit side. What we've said historically is we think of a normal run rate for that TPG Capital Markets business at today's level to be around 100,000,000 So on a quarterly basis, 55% is high relative to that normal run rate. Now that's going to be growing over time as we grow our businesses. And then you layer on top of that, opportunities from AG, which were in the early innings of developing.

Speaker 4

So I would think of the AG contribution growing during the course of the year this year. And then the TPG side Stepping down to a below normal level in Q1 because the seasonally light number of deals closing in Q1. So the TPG side back loaded And the AG side also kind of feathering in during the course of the year and growing during the course of the year. So much like this year where you saw our capital revenue line start low and grow toward the back of the year, I'd expect the same kind of pattern this year.

Speaker 5

Great. That's helpful. Thank you. Thanks.

Operator

The next question comes from Bill Katz with TD Cowen. Okay.

Speaker 5

Thank you very much for taking the question this morning. Just want to pick up on that last question. As you think about the opportunity set for the capital markets platform within the Angelo Gordon, would Apollo be a reasonable Directional view and how much of that assumption is embedded in the 45% long term FRE margin target?

Speaker 4

Thank you. Hey, good question. We I think that what Apollo is doing is a decent kind of directional proxy for the opportunity set. I would say we're pretty early in kind of underwriting that opportunity for ourselves. So, we're not ready to put a target number out there.

Speaker 4

But the longer term FRE margin of 45%, I would say only incorporates piece of that opportunity.

Speaker 5

That's it for me. Thank you.

Speaker 1

Okay. Thanks.

Operator

The next question comes from Brian Bedell with Deutsche Bank.

Speaker 7

Great. Thanks. Good morning, folks. Maybe my questions were Answered. But maybe just some perspective on the timing of the deployment that you outlined on Slide 18 In terms of the 132,000,000 and thanks for the color on breaking or segmenting that 132, But just if you can give us some color on how you think that might be deployed over course of this year, is it are we in a situation where we're likely to see that $132,000,000 be reflected, say, mostly By year end or is it much more dependent on credit conditions within HE?

Speaker 4

Well, I would say, as I said a few minutes ago, most of that $132,000,000 is associated with capital not yet deployed, not the natural step up of capital already deployed on fees, the step up structures, funds of step up structures. So, just thinking about your question, real time, that capital underlying the capital not yet deployed probably has Just taking a kind of swag of 3 year deployment pace to it on average across those funds. So if I had to take a guess, I'd say that would kind of feather in over about a 3 year period.

Speaker 7

Great. Thank you.

Operator

The next question comes from Adam Beatty with UBS.

Speaker 5

Just wanted to ask about performance In the credit portfolio, I appreciate the earlier comments around, I think it was either equity or firm wide 20% revenue growth with stable margins. But there is some concern these days around middle market credit, despite the growth there. Obviously, AG Credit performance was quite good. And I know there's pretty intense monitoring and tight docs around that. So just wondering any detail you could share about how those companies are performing, whether or not there's been equity backstops or

Speaker 4

what have you? Thanks very much. Yes. A general question on

Speaker 5

that in

Speaker 4

a second. But I just sorry, I just want to finish That last question that Brian asked, the 132, so I don't want to leave the impression that that's like a one time opportunity that comes in over a 3 year period. As that capital is deployed, we're obviously raising a lot more credit capital as we've talked about. So the $10,000,000,000 of credit capital plus that we expect to raise this year will all come in with no fees yet and have whatever fee rate you want to assume across our credit business. We've provided some detail there.

Speaker 4

So that $132,000,000 of fee opportunity should be growing over time as we're realizing what's embedded today.

Speaker 3

Just to pick up on

Speaker 2

the question on in terms of credit quality and what's happening in the portfolio. I think that As I mentioned or alluded to, performance has been across our credit strategies has been very, very good. And just to give you Maybe a little bit more color on some data on it. If you look at our direct lending business through Twinbrook Or by the way, our pipeline is up reasonably meaningfully this year based upon transaction activity that we're seeing. We're also seeing Generally, a quality uptrend just in terms of the opportunities that we're seeing.

Speaker 2

But if you look at the performance of the business Over the course of last year, we had no credit losses in the business. And the performance of the portfolio was generally reflective, I think, of what was happening overall within our private equity portfolios. Remember that Twinbrook's business is very sector focused. And so across things like business services and health care within their portfolio, they saw strong performance. And so I think on the at least from at least in terms of our selection criteria, what we do.

Speaker 2

We obviously have a very selective process of how we're underwriting. We also our underwriting in that business with lower leverage on average as a result of the lower middle market nature of as well as covenant protections across our portfolio, which obviously allows us to get back to the table and work with sponsors to the extent that we need to. But portfolio is very strong overall. And I would say, the outlook in terms of the pipeline continues to be on an uptrend in terms of quality generally. In Credit if you look across our business, I think I said in my comments that our performance was very strong in excess of 300 basis point premium over where the indices ended up.

Speaker 2

I think Jack alluded to the fact that there was a strong rally in credit spreads at the end of the year that obviously had a significant impact

Speaker 4

on the portfolio.

Speaker 2

And generally, what we've done is where we see change in valuation like that and a return to historical tight spreads, we've been generally net sellers of the public credit opportunity as a result of that. So We've been liquidating a number of positions across our credit solutions book. And we've essentially pivoted our focus from kind of public opportunities because of the tightness of the market to really more private opportunities, more bespoke private opportunities, which are a combination of structuring private credit opportunities as well as rescue finance opportunities. And the opportunity set there in front of us is very, very substantial and very Very large. If you look at the structure of the market, there's over $1,000,000,000,000 of single B rated or triple C rated capital structures that are essentially coming due over the course of the next several years.

Speaker 2

If you look at the market right now, about almost half of the leveraged loan market has less than 2x interest coverage, which is to the and that's probably more typically like 20% of the market, historically has less 2x interest coverage. So with those with that structural dynamic in force in the market right now, It's going to create a lot of very interesting private opportunities for us to execute on. And there, we're able to use We're able to use our sector knowledge and our industry knowledge across both our credit business as well as our private equity business in order to underwrite those credits and value those companies. So we feel like the dynamics in terms of the way that's setting up is very positive for us. And then lastly, on the structured credit side, the biggest theme here is What's going on with respect to the need for capital and the when you look at the community and regional bank stresses that are going on in the market and continuing to go on in the market, we think we're very early in terms of that dynamic out.

Speaker 2

It's kind of a second or third inning dynamic with respect to regional bank deleveraging, and we're going to continue to see that stress drive asset sales and credit risk transfer. And I think overall, we're also seeing an opportunity to upgrade the quality of the counterparties that we're working with, looking for that risk transfer. And on average, I would say non EBITDA credit has not participated in the rally that corporate credit participated in. So in terms of relative value, we see a lot of interesting opportunities there. So and there have been a number of situations recently.

Speaker 2

We just purchased a portfolio, a $600,000,000 portfolio of consumer secured loans from a community bank, with really attractive return characteristics to it. So, the portfolio is in great shape and the opportunity set is even better. So, that

Speaker 4

hopefully that gives

Speaker 2

you some guidance on how we're positioned.

Speaker 5

Very helpful. Thank you, John.

Operator

This concludes the Q and A portion of today's call. I would now like to turn the call back over to Gary Stein for any additional or closing remarks.

Speaker 1

Great. Thank you. Thank you all for joining us. If you have any follow-up questions, please feel free to circle up with the investor relations Otherwise, we look forward to talking to you again next quarter.

Speaker 4

Thanks everyone. Thank you.

Operator

This concludes Today's TPG's 4th Quarter and Full Year 2023 Earnings Call and Webcast. You may now disconnect your line at this time and have a wonderful day.

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TPG Q4 2023
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