TPG offers management fee discounts for fund

Firm: TPG Capital Management

Fund: TPG Partners VII

Target: $8 billion to $10 billion

Amount Raised: At least $2 billion via interim fund

TPG Capital mailed out its private placement memorandums for the fund over the summer, with various options for management fees, two sources who viewed the document told Buyouts.

TPG will offer a conventional fee option: a 1.5 percent management fee, which drops to 0.75 percent after the investment period. Or LPs may opt for a “J-curve mitigant” fee structure that amounts to roughly the same fee payments, back-ended to smooth out returns. That second option includes a 0.625 percent management fee during the investment period, which jumps up to 1.5 percent of invested capital.

The carried interest in both scenarios remains the standard rate of 20 percent.

Along with the two fee alternatives, TPG is offering management fee discounts based on the size and speed of investments. All investors in the first close receive a 10 percent discount, plus an additional 5 percent off for commitments of $100 million or more; an additional 10 percent for more than $250 million, and additional 15 percent for a commitment of more than $400 million.

A spokeswoman for TPG Capital declined to comment.

A source who works with LPs said TPG Capital won’t have much trouble reaching its target because of the lack of mega buyout funds in the fundraising market right now and the need for some investors to write big checks.

A second source that works with LPs said TPG’s latest fund is “not a slam dunk” because of the firm’s move to invest in Washington Mutual prior to the financial crisis; also debt-laden Caesars Entertainment Corp, as well as Energy Future Holdings, the largest LBO of all time that recently went into bankruptcy partly because of low natural gas prices that were unexpected at the time of the power company buyout.

A placement agent familiar with TPG said most big LPs have already placed investments with a crop of flagship funds in the past two to three years from Apollo Global Management, Blackstone Group, Carlyle Group and Kohlberg Kravis Roberts & Co, among others. That may add up to a steeper hill to climb for TPG.

“It’ll end up getting done—it’s just a question of how much private plane fuel they’ll need to use and acting contrite,” a separate placement source told Buyouts.

Recent wins on the fundraising trail for TPG include hitting its $3.2 billion target on its third special situations fund, TPG Opportunities Partners III, in March and $3.3 billion for TPG Asia VI, in May. The firm has raised TPG Strategic Partners Interim Fund, with about $2 billion in commitments, to roll into Fund VII.

In February, Washington State Investment Board committed by a unanimous vote $600 million to the interim fund in a meeting attended by TPG co-founder James Coulter and Jamie Gates, a partner and member of the firm’s leadership committees. Fabrizio Natale, assistant senior investor officer for private equity at Washington State, told the retirement board that TPG has “returned to its roots” with mid-market transactions of $200 million to $400 million, according to minutes of the pension system’s meeting.

Tara Blackburn of advisory firm Hamilton Lane told WSIB that TPG’s performance has improved and that the GP “is one of the strongest in the market and is well situated to continue producing top-tier returns.”

TPG started signaling LPs about Fund VII back in late 2012, when the firm founded by David Bonderman and Coulter suggested its next flagship fund would range from $8 billion to $12 billion, according to a report by sister website peHUB. In the summer of 2013, TPG asked investors to extend the investment period by 12 months to February 2015, for TPG Partners VI LP, its blockbuster flagship fund that raised nearly $20 billion in 2008.

It is not unusual for big private equity firm to offer arange of different fee structures nowadays. For Bain Capital Fund XI, the Boston firm offered investors a 1.5 percent management fee with 20 percent carried interest fee structure after providing investors a 7 percent preferred return rate. It also offered a 0.5 percent management fee with 30 percent carried interest and no preferred rate of return. Bain Capital closed on $7.3 billion in April for Fund XI, according to a report by sister wire service Reuters.