TPG Inc. (NASDAQ:TPG) Q4 2023 Earnings Call Transcript
TPG Inc. (NASDAQ:TPG) Q4 2023 Earnings Call Transcript February 13, 2024
TPG Inc. beats earnings expectations. Reported EPS is $0.51, expectations were $0.41. 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 Fourth 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. [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 will 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 Executive Chairman and Co-Founder, Jim Coulter; and our President, Todd Sisitsky, 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, reflecting the close of the Angelo Gordon transaction on November 1, 2023.
We also present pro forma 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 forma financial information. 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 fourth quarter. We reported GAAP net income attributable to TPG Inc. of $13 million and after-tax distributable earnings of $206 million 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 8 to holders of record, as of February 23. With that, I'll turn the call over to Jon.
Jon Winkelried: Thanks, Gary. Good morning, everyone. 2023 was a transformative year for TPG, and I'll begin today by sharing several updates on our progress. On last February's earnings call, we laid out a growth agenda for the year that included three key components. First, scaling our existing strategies and in particular, completing several important fundraises, second, continuing our strong track record of driving organic growth and innovation; and third, expanding our business through targeted acquisitions. We're excited about the progress we've made in all three of these areas. Looking at our business today, we manage more than $220 billion 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. First, as it relates to existing strategies, we have completed the fundraises for the next generation of our TPG Capital, Healthcare 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. 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 too, we held our final close with $15.6 billion of aggregate commitments, up 10% from the prior vintage. And for Rise 3, we closed on $2.7 billion, 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 expand engagement across additional TPG strategies and products. For our ongoing Capital Asia campaign, we have raised $4.3 billion 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 to fund to be larger than its predecessor. Second, we continue to demonstrate our ability to grow organically by launching and scaling products in parts of the market, where we have distinct competitive advantages.
I'll highlight a few of these initiatives. Our new real estate credit strategy received more than $750 million of commitments and closed on approximately $650 million in the fourth quarter. 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 a $1.5 billion commitment to the next generation of TPG Rise Climate Private Equity Funds from Altera, the UAE's $30 billion climate-focused investment manager.
This includes a $1 billion commitment to our second Rise Climate Fund and a $500 million commitment to our new Global Solve initiative. The UAE 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 are also preparing to launch our Inova Climate Transition Infrastructure Fund. And just last week, we announced that Scott Lebo will be joining TPG later this year as the Head of Infrastructure for TPG Rise 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 fourth quarter, meaningfully expanding our capabilities across credit and real estate and further enhancing our presence in Europe and Asia.
We believe the acquisition of Angelo Gordon will be a significant growth driver for the firm in a number of ways. One key area is 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 wire houses and private banking partners. We are focused on delivering additional products that 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 opportunities and businesses that leverage the combined expertise and capabilities of TPG and AG. The most near term is the ability to generate incremental 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, we have substantially 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 channels. Looking ahead, we expect our growth this year to be driven by five primary vectors, including: one, credit fundraising across all our TPG AG strategies; two, the newest vintages of our growth and Rise climate private equity funds; three, the launch of our climate transition infrastructure strategy, four, the completion of several first-time fund raises, including real estate credit and GP secondaries; and five, new product and channel development.
Turning to our fourth quarter results. We had a strong year -- a strong end to the year with $8.8 billion of capital raised in the quarter, primarily across the campaigns, I discussed earlier. We believe we are well positioned with $51 billion of dry powder to deploy into what we view as an improving market backdrop. You may remember that during our second quarter '23 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 strains, such as executing corporate carve-outs and structuring proprietary creative financing solutions.
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 see -- 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&A pipeline, as the economy continues to show signs of steadier growth, leading to new origination opportunities. Our investment teams have been very busy deploying nearly $12 billion in the fourth quarter. Deployment picked up significantly across our platforms in the second half of the year, and we invested over $22 billion 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 fourth quarter alone, we closed three transactions, including a very interesting platform building investment that combines several hospital groups in Southeast Asia.
This unique transaction led by our existing 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 $1.1 billion of capital for our sixth 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 first Rise Climate Fund is now approximately 75% invested and reserved, across a diverse portfolio of 21 companies, that grew revenue nearly 30% in 2023.
Additionally, our two IPOs last year, Nextracker and Tata 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 second Climate Private Equity fund and new Climate Transition Infrastructure strategy. Turning to our Credit strategies. Our middle market direct lending platform, TPG Twin Brook, has maintained its strong performance through a 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, Twin Brook had no realized credit losses and deployed nearly $3 billion of capital on a pro forma basis into more than 30 new companies and over 260 add-on investments to existing borrowers.
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 hundred basis points. In terms of capital activity, Credit Solutions invested more than $1.2 billion in the fourth quarter, notably in a number of bespoke, privately structured financing transactions and deployed nearly $2.7 billion of capital in 2023 and both on a pro forma basis. In addition, our Essential Housing business originated financing projects during the year with more than $4 billion 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 price structured credit opportunities. In addition, public securitized credit continues to trade with an attractive excess spread relative to corporate credit. Finally, last year's regional banking prices further enhanced, both the investment opportunity set and client interest in the space. As a result of the dislocation and traditional structured credit providers, we have already deployed more than 60% of TPG AG's and Norwell [ph] asset-based private credit fund and 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 attractive assets from sellers in need of capital -- in need of solutions capital. For example, in the fourth quarter, our TREP Fund acquired a majority interest in two Class A Industrial business parks in the Greater Toronto area, which we view as one of the best performing industrial markets in North America with a sub-2% vacancy rate and high barriers to entry. Additionally, TPG AG Real Estate had $7.3 billion of dry powder at year-end, with dedicated funds in the U.S., Europe and Asia and a global network of approximately 200 operating partners, TPG AG real estate is well positioned to deploy its flexible and opportunistic capital across a range of attractive opportunities.
Finally, I want to highlight TPG Next, which completed its inaugural investment this quarter in the visualized group, a new investment manager. TPG 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 see 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. We have a robust pipeline of interesting investment opportunities.
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.
Jack Weingart : Thank you, John. As Gary mentioned earlier, I'll be discussing our results today on an actual basis, which includes two months of TPG Angelo Gordon from the acquisition close date of November 1, through December 31. In our earnings release, we've also provided pro forma financials for the fourth quarter and full year 2023, which assumed the transaction closed on January 1, 2023. We ended the year with $222 billion of total assets under management, up 64% year-over-year. This was driven by $75 billion of acquired AUM, $16 billion of capital raised and value creation of $7 billion, partially offset by $10 billion of realizations and $1 billion in outflows over the last 12 months. 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 billion, and we had more than $51 billion of dry powder available to deploy, representing 38% of fee-earning AUM. We also had AUM subject to fee earning growth of $24 billion at the end of the year, of which $14 billion was not yet earning fees. 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 million in the quarter, up 45% sequentially and 51% year-over-year and $1.3 billion for the year, up 23% from 2022. Management fees totaled $396 million 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 to the final closes for the capital and Rise Funds.
Transaction fees increased 79% sequentially and 20% year-over-year to $55 million in Q4. A record level and totaled $108 million for the full year. Our fourth 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 Jon 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 million for the fourth quarter, up 45% sequentially and 62% year-over-year. And $606 million for 2023, up 34% from 2022. Our FRE margin was 49% for the fourth quarter and 45% for the last 12 months, a 350 basis point improvement from 2022.
On a pro forma basis, assuming the AG acquisition closed on January 1, our FRE margin would have been 47% for the fourth quarter and 40% for the full year. It's important to note that these pro forma margins were elevated by the significant catch-up fees and transaction revenues in the fourth 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 our margin expansion. We expect our FRE margin to exceed 40% for the year in 2024, as we realize operating leverage and synergies from the integration and scaling of our business. While also investing in growth initiatives we've described. 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%.
After-tax distributable earnings for the fourth quarter were $206 million or $0.51 per share of Class A common stock, including $19 million 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 portfolios, 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. In the fourth quarter, we also incurred $18 million 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 integration 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 fourth quarter. We ended the year with $105 million of cash and cash equivalents, approximately $500 million drawn on a revolver and $450 million of other long-term debt. As I've mentioned previously, we upsized our revolver from $700 million to $1.2 billion last September and currently have approximately $700 million of undrawn capacity. Our balance sheet post closing remains conservative, with moderate leverage and ample liquidity. Our net accrued performance balance at the end of the year was $891 million, compared to $692 million in the third quarter.
This 29% increase was driven by $141 million of accrued carry attributable to TPG AG, at the acquisition date and the $77 million increase in the value of our investments, partially offset by $19 million 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. At the end of the year, our performance eligible AUM totaled $192 billion or 87% of our total AUM, of which $151 billion 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, and our portfolio continues to demonstrate strong cost management and stable margins. TPG AG's credits appreciation of 4% in the quarter and 14% in 2023 on a pro forma 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 portfolio 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 that we provided at our Teach-In in November. We expect our 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 Transition Infrastructure Strategy. Additionally, in 2024, we expect fundraising for TPG AG Credit to exceed $10 billion, more than doubling the capital raised by the platform in 2023 on a pro forma basis. On credit deployment, as Jon 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 two 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. 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.
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