Buyout firm TPG embraces Tech, China

The 2005 leveraged buyout market probably won’t be remembered by historians for breaking deal volume or fund-raising records, because those tallies are expected to be eclipsed in 2006.

Instead, 2005 will go down as a transformative year in which generalist firms finally turned their sights toward the New Economy targets of high-tech and China. 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 teamed up in 1993. Their very first deal was a $65 million investment in bankrupt Continental Airlines. 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 fund-raising 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, but the firm was successfully positioning itself for the coming tech-deal tsunami.

A similar shift was occurring 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 expanded their reach into the broad Asian markets.

“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 about a 20% stake in the most recent Newbridge vehicle, and will maintain some sort of limited partner position.

Coulter declined to discuss fund-raising, 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 the 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.