Coulter: TPG targets industries in ‘moments of change’

  • TPG co-founder addresses New Jersey’s pension board on Wednesday
  • Media, security, software sectors undergoing periods of rapid change
  • Shifting PE industry prompts adjustments from GPs, LPs

New Jersey State Investment Council got treated to a lecture on investing and evolutionary theory from TPG co-founder Jim Coulter.

TPG, which manages more than $2.3 billion of commitments for New Jersey, has concentrated its recent investments on industries undergoing periods of “punctuated equilibrium,” Coulter said. The term refers to an evolutionary theory that species evolve over short periods marked by dramatic physical changes, followed by long periods of stasis.

“If you can catch industries in moments of change, that’s where returns are driven,” he said on Jan. 25 at the council’s annual meeting in Trenton.

In his presentation, Coulter cited major shifts in the media, security and software sectors, as well as transitions in consumer trends that TPG is tracking as it deploys private and growth equity capital. The firm closed its most recent flagship buyout fund on $10.5 billion last year.

One of Coulter’s examples involved the consumption of media, which changed dramatically over the past decade with the advent of smartphones and tablets, along with readily accessible high-speed internet. As a result, a growing segment of the population no longer subscribes to traditional cable services.

“People started to look at media over the internet; they started cutting the cord. Today, one in every five hours of media are consumed over the internet. And that’s growing at a rapid pace,” he said. TPG’s private equity portfolio includes stakes in Spotify, a music-streaming service, and digital-content studio STX Filmworks.

Similarly, commonly held misperceptions about rising crime rates — most assume crime rates rose year over year, while they actually fell, according to Gallup — prompted sharp growth in the security-services industry, Coulter’s slide-show presentation said.

That thesis, further punctuated by ongoing cybersecurity concerns triggered by the 2016 election, influenced TPG’s recent acquisition of IT-security firm McAfee for $4.2 billion last year.

“Our No. 1 investment area has been cybersecurity,” Coulter said. “One thing I know about this election, no matter how you feel about what happened, one thing we do know is that cybersecurity won.”

With interest rates still near historic lows and investors scrambling for yield, private investments in growth and innovation-related investments are investors’ best bet for sustained returns, Coulter told New Jersey State Investment Council.

“When private equity started, it invested in stasis. Big, steady companies,” he said. “I think change is more important when the beta trade is off.”

Changing PE industry

Another industry undergoing a state of punctuated equilibrium is alternative assets, Coulter said. According to his presentation, 22 alternative-asset firms had assets exceeding $1 billion in 1995. Today, 500 or more such firms have $1-billion-plus AUM, the presentation said.

The rapid growth of the PE and alternative-asset industries has been spurred by public pensions, including New Jersey’s, which quickly increased their allocations to the asset class over the previous two decades to capture yield.

In recent years, however, an influx of capital from sovereign-wealth funds and other investors has mitigated some of the sway limited partners held over certain private-equity firms.

As a result, LPs have become “price-takers” when it comes to setting terms, New Jersey Division of Investment Director Chris McDonough said during an alternative-assets overview at Wednesday’s meeting.

“In any industry, the incumbents have an advantage,” Coulter told Buyouts after his speech, identifying public-pension LPs like New Jersey among the incumbents.

As larger entities, or less public entities, enter the space, those pensions will probably be best served by applying the knowledge they’ve accrued over previous decades to move forward. That could involve separate accounts or, as with California Public Employees’ Retirement System, concentration of commitments around “core” relationships, Coulter said.

“New Jersey’s an important relationship for us. If they ask me to come talk, I’m going to be here,” Coulter said.

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