Give Us Your Tired, Your Underperforming

Let cynics call them vulture capitalists. Firms that pursue distressed investing and turnaround strategies represent the best of the alternative asset classes.

First they need the chutzpah to embrace companies or assets at their nadir—like buying up tulip fields in Holland circa 1650 in the wake of that seminal bubble. Then add the patience to see the company through the dark times, bringing in new capital, new management, new ideas as needed.

Many turnaround firms operate in obscurity, by choice or by happenstance. In recent months sources close to two of them have pushed back the curtains to reveal more about their strategies and track records. One is TPG Credit Management, an affiliate of David Bonderman’s TPG Capital, the other GI Partners, which got its start 10 years ago with a $500 million allocation from California Public Employees’ Retirement System.

Executives at TPG Credit Management, out in the market seeking $800 million for TPG Credit Strategies Fund II LP, declined to comment for this article. But one can piece together a picture of this roughly 40-person investment team, headquartered in Minneapolis and with an office in London, from various Web sites, press releases and other sources.

TPG Credit Management was founded in 2005 by Managing Partner Rory O’Neill, who previously had been responsible for investing in corporate credits at CarVal Investors LLC, an affiliate of agricultural giant Cargill. Other key executives include Evan Carruthers and Jim Musel, both partners and portfolio managers, and London-based Jonathan Fragodt, responsible for investing in European distressed loans.

In 2007 the firm secured $475 million in committed capital for one if its earliest funds, TPG Credit Strategies Fund LP. The successor, expected to hold a first close in the next few months and likely to be capped at $1.2 billion, is tagged for a variety of distressed assets and credits. These include used aircraft (acquired from hedge funds, proprietary trading desks and other sellers and leased out), mid-market distressed corporate debt and non-performing loans in Europe.

According to a press release issued in February, the firm recently secured more than $600 million for a more narrowly tailored fund called Airline Credit Opportunities II, ahead of its $400 million goal. The fundraising win suggests that buying and leasing aircraft has proven lucrative for the firm. Altogether TPG Credit Management has raised about $2.2 billion across four funds, according to the release.

GI Partners, meantime, has been hiding in plain view, thanks in part to a Web site describing its strategy in detail and listing all its active portfolio companies. It has operated below the private-equity radar in part because CalPERS categorizes it as a real estate manager, even though it has diversified into underperforming assets and companies in a variety of fields.

All told, CalPERS has committed about $1.5 billion across three GI Partners funds—the $500 million captive fund set up in 2001, a $1.45 billion co-mingled fund closed in 2006, and a $1.9 billion co-mingled fund closed in 2009 that is about 70 percent deployed. The firm, which has 54 investment professionals in the United States and Europe, is expected to launch a fourth fund earmarked for North America in the fourth quarter or early next year. Prior backers include the California State Teachers’ Retirement System, Oregon State Treasury, the Teachers’ Retirement System of the State of Illinois and the New York City Employee Retirement System.

Despite disappointing results in Europe, the firm has scored big wins in such fields as business services, commercial mortgage-backed securities, retail development, film production and skilled-nursing facilities.

One of its best calls was buying up, in the wake of the dot-com and telecom busts, some two dozen data centers for an average of 70 percent of replacement cost. The $250 million the firm invested in the roll-up blossomed into nearly four times that by the time it fully exited in 2007 through stock sales of Digital Realty Trust on the New York Stock Exchange.

Oregon State Treasury shows GI Partners Fund III generating a 1.24x total value multiple on its $200 million commitment, and GI Partners Fund II generating a 1.37x on its $100 million commitment as of March 30, although a source close to the firm said GI Partners’s North America-only track record is better than those figures would suggest. In a big vote of confidence for the firm late last year, CalPERS transferred a $1.9 billion portfolio of industrial real estate assets to GI Partners to manage.

Investing in turnarounds is a tough business. But institutional investors that have backed the best practitioners of the strategy have been amply rewarded. Through painstaking appraisal of liquidation values, turnaround firms always know their worst-case scenarios. And when they pick the right companies to back, at the right time, they benefit from an unsung force many of us can relate to.

The passion and fight of employees given a second chance.