Some did so enthusiastically, while others were more cautious. But by last December there wasn’t a serious group left that hadn’t analyzed the wisdom of buying SunGard or of putting boots in Beijing.
Texas Pacific Group certainly recognizes the market transformation, but has a slightly different historical perspective. Instead of being caught up in winds of change, TPG simply sits back and calmly thinks: “We told you so.”
TPG has been a contrarian since David Bonderman, James Coulter and William Price first teamed up in 1993. Their very first deal was a $65 million investment in bankrupt Continental Airlines at a time in which legacy commercial airlines were viewed similarly to how they’re viewed today. The infusion and TPG’s management acumen helped Continental climb out of its crater, with TPG ultimately reaping a 9.5x return.
“One of the questions we’ve always asked ourselves is why something is out of favor, and whether we should take a different view,” Coulter says.
That approach was evident during TPG’s initial fundraising drive in 1994. When a prospective LP asked the firm what types of deals it wouldn’t do, the canned, industry-standard response was that it wouldn’t do tech. But Bonderman quickly regrouped, asking how anyone could build a firm for the next 20 years while simultaneously ignoring the economy’s fastest-growing industry segment. It would soon close its inaugural fund with $720 million, and began making geek bets like GlobeSpan Technologies, Zilog Inc. and the eye-popping $1.6 billion acquisition of Motorola’s semiconductor components division in 1999. Not all of these deals were winners (see Zilog), but the firm was successfully positioning itself for the coming tech-deal tsunami.
A similar paradigm was operative in 1995, when TPG began its first forays into China. Specifically, it felt that China was the 800-pound gorilla in the crystal ball, and that seeds should be planted as soon as possible. Rather than going it alone, TPG teamed up with San Francisco-based Richard C. Blum & Associates to form a $105 million joint venture called Newbridge Capital. The fund was focused on Mainland China, although subsequent Newbridge funds would expand their reach into the broader Asian markets. TPG and Blum also launched a Latin American effort, but it collapsed along with the Argentinean and Brazilian economies.
“Most of the major buyout shops are just heading to Asia now, but we already have 28 people in six offices,” Coulter says.
TPG also is evolving its Asian strategy to maintain its competitive edge. The first step came last year when it used both TPG and Newbridge money to buy a piece of Lenovo, in conjunction with the Chinese computer company’s purchase of IBM’s ThinkPad division. The next piece will come when TPG subsumes Newbridge later this year, with future Asian investments coming out of TPG’s general fund. Blum is believed to have around a 20% stake in the most recent Newbridge vehicle, and will maintain some sort of limited partner position.
TPG showed great foresight with its preemptive entry into the high-tech and Chinese markets, but vision alone is not why Buyouts selected it as its Firm of the Year for 2005. Instead, it also was the most high-profile firm this side of Blackstone, with big-name deals, an anticipated $10 billion-plus fundraising and some unpleasant messes on the tarmacs of Britain.
The firm’s two best deals of 2005 already have been honored by Buyouts for Emerging Market Deal of the Year (Lenovo) and European Deal of the Year ($2 billion buyout of Greek cellular company TIM Hellas with Apax). But it also co-led the $5.1 billion buyout of Neiman Marcus Group, led the £668 million buyout of U.K. furniture foam company British Vita PLC and was involved in the $4.94 billion Sony-led buyout of Metro-Goldwyn-Mayer (MGM). It also was part of the record-breaking $11.3 billion SunGard acquisition.
Coulter declined to discuss fundraising, but TPG is believed to be raising upwards of $12 billion for its fifth fund, which would more than double the $5.3 billion it raised for Fund IV in 2003. Despite the massive growth, LPs have been flocking to the fund. Most recently, the Oregon Investment Council committed upwards of $600 million, despite a $300 million recommendation from its private equity team.
Not everything, however, came up roses for TPG in 2005. Its largest hiccup came when portfolio company Gate Gourmet fired workers who had walked out in protest of Gate Gourmet’s hiring of seasonal workers in London. The action triggered a sympathy strike by British Airways workers, thus canceling hundreds of flights in and out of Heathrow Airport. Coulter calls it the year’s lowlight, and also believes that blaming Gate Gourmet or TPG for the strike was unfair.
Going forward, Coulter says that he expects the buyout market to continue doing strong business. He acknowledges that the debt markets could tighten, but doesn’t expect an outright crash. “If you had told me three years ago that we’d have $65 per barrel oil, GM and Ford in trouble, and ongoing war in Iraq I would have told you to be worried. But all of that’s happened and we’re still doing fine.”