TPG Capital finally has a good story to tell investors

October 27, 2014, 4:03 PM UTC

Private equity giant TPG Capital had its annual investor meeting last week in San Francisco, and there were two surprises:

  1. Attendees were entertained by The Who (rumor had been that it would be Eric Clapton).
  2. The firm’s new flagship fund might actually reach its $10 billion target.

Nearly two years ago, I wrote about why TPG was going to have fundraising challenges this time around. And the WSJ’s Mike Specter followed up with similar (albeit updated) thoughts this past summer.

But I’ve spoken with multiple LPs this week, and all believe that TPG is going to get this thing done.

One thing that helps is that new fund’s target is nearly 50% smaller than the $19.8 billion TPG raised for its sixth flagship fund in 2008. Moreover, it already has around $2 billion in commitments from a “bridge” commitment made earlier this year by state pension systems in Oregon and Washington (the bridge has not yet been tapped, but will be if TPG completes a new deal before holding a first close). Part of the reduced size is explained away by TPG’s recent decision to raise separate funds for asset classes like real estate, which had a $2.5 billion allocation out of TPG VI. But it also is a reflection of anticipated fundraising difficulties.

More importantly, the firm has spent the past year endearing itself to limited partners.

For starters, it has not run away from responsibility for its two investment disasters: Washington Mutual and Energy Future Holdings (f.k.a. TXU), in which it lost at least $4 billion. Instead, it essentially begged forgiveness, while working to improve value from the remaining portfolio. As of May 31, 2011, TPG’s fifth fund (which holds WaMu and Energy Future) had an internal rate of return (IRR) of -4.54%. That figure had improved to 4.3% by the end of this past June. Moreover, the IRR for TPG’s sixth fund had improved from 1.3.6% to 11.9%.

Second, TPG‘s annual limited partner meeting is usually followed by a CEO summit, which means that LPs share the room (and TPG partner facetime) with a cavalcade of execs and bankers. That was done away with this year. Finally, and perhaps most importantly, TPG covered most of the LP portion on its “collusion case” settlement. Relatively small money for David Bonderman and Jim Coulter, but a big relief for LPs (particularly those at public pensions).

To be sure, the fund isn’t raised until it’s raised. But there has been widespread PE market speculation that TPG could join veteran firms like First Reserve and Providence Equity in taking a major target haircut, and I don’t believe that will be the case.

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