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TPG Capital nears first close on giant new fund

Key Speakers At The Bloomberg Year Ahead 2015 ConferenceKey Speakers At The Bloomberg Year Ahead 2015 Conference
David Bonderman, co-founder of TPG CapitalPhotograph by Andrew Harrer — Bloomberg via Getty Images

TPG Capital has scrapped plans to hold a first close this month for its seventh flagship buyout fund, which is targeting a total of $10 billion, according to sources familiar with the situation.

Instead, the Fort Worth-based firm now plans to hold a first close on between $4 billion and $5 billion in mid-January, which would include the rollover of a $2 billion bridge fund and up to $400 million from the firm’s partners. TPG originally had expected several investors to need the 2014-dated close for calendar allocation reasons, but it turned out not to be the case. Also, expect a first close on TPG’s new $3 billion-targeted growth equity fund to occur sometime in February.

Fortune has obtained a private placement memorandum for TPG Partners VII, which includes a variety of previously-reported fee discounts for larger investors. Hard to tell how much of this will ultimately be applied, however, given that some prospective investors say that there could be wide variance on side letter agreements (and fee discounts are excluded from the fund’s “most favored nation” clause).

Through June 30, the net internal rates of return (IRRs) for TPG’s three previous flagship funds were 16% (TPG IV), 5% (TPG V) and 12% (TPG VI). Each one is below the relevant Cambridge Associates benchmark. Within those returns

TPG is sharing 100% of most portfolio company-related fees with its limited partners, but explicitly excludes fees that may be paid by portfolio companies to TPG consultants or senior advisors (neither of whom are considered to be firm employees). LPs also must reimburse TPG for up to $5 million in so-called “organizational expenses,” which can include legal and travel. The PPM also suggests that most portfolio company management agreements will continue to come with so-called acceleration clauses, and that portfolio fees “may adversely affect a portfolio company’s financial performance” (something which is obvious, but rarely acknowledged by PE firms).

Finally, there are two pieces of boilerplate in the PPM which stood out to me as fairly egregious, even if they are industry standard. All defenses can be emailed to me

“Since the amount of carried interest payable to the General Partner depends on the Partnership’s performance, we may have an incentive to approve and cause the Partnership to make more speculative investments than it would otherwise make in the absence of such performance-based compensation. We may also have an incentive to dispose of the Partnership’s investments at a time and in a sequence that would generate the most carried interest, even if it would not be in the Partnership’s interest to dispose of the investments in that manner.”

And

“The General Partner may take its own interests into account in the exercise of such discretion. The exercise of such discretion may negatively impact the Limited Partners generally or may impact some Limited Partners disproportionately.”

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