For most buyout firms, simultaneous success in all the important areas of this business-fund raising, deal making and exits-is a rare commodity. Given the market’s cyclicality, as well as the time commitment involved with any of the aforementioned priorities, it’s not uncommon for one or two of those three to get pushed aside during a given time period.
But for Texas Pacific Group, 2003 was the year when everything clicked. “The buy windows and sell windows don’t line up very often, but 2003 was a very busy year on both fronts,” TPG Founding Partner James Coulter says.
On the buy-side, TPG’s success shouldn’t come as a surprise to anyone that follows the industry. Given its history and its focus on the large market, if there is a high-profile auction drawing private-equity interest, the firm’s name is typically on the top of the list.
Last year was no different, although in 2003, TPG seemed to concentrate the bulk of its buyout activity in Europe. “We tend to move back and forth strategically,” Coulter says. “The financing markets were a little more vibrant earlier last year in Europe, but overall our activity did not represent any great strategic statement. It was more just the combination of the deals we looked at and the financing environment.”
In all, TPG completed three acquisitions, including the GBP1.7 billion purchase of U.K. retailer Debenhams, the GBP2.51 billion buyout of Scottish & Newcastle’s pubs division, and a $770 million secondary LBO of Kraton Polymers. The firm also agreed to buy the former Enron subsidiary Portland General Electric in a $2.35 billion deal, although that transaction was not completed before the close of 2003.
“We think 2003 will turn out to have been a very good year for the buyout market,” Coulter says. “There was a turn in the marketplace, with a shift from a market dominated by distressed sellers to a market where real, high-quality businesses began to come up for sale.”
And while the shift in direction signifies a strengthening of the economy, it did not necessarily result in unbridled bidding from TPG on the properties for sale. For the most part, strategic buyers remained on the sidelines, and the IPO market, while showing signs of life, was not the easy road sellers remember from the late nineties. “2003 was interesting because the IPO window was mostly closed and strategic buyers were substantially less active than in years past,” Coulter says. “There is a lot of money in private equity right now, but in our market, the most difficult competitors are the strategic buyers and the IPO market. Last year, the relative balance of power was on the financial buyers’ side.”
Finding The Exits
While it was the big-ticket acquisitions that generated the most press for TPG, it was the firm’s exits that generated the profits. In all, the firm returned roughly $1.5 billion to its limited partners, most of it coming from the sale of TPG technology assets.
“The ability to exit is really about the ability to buy at the right price,” Coulter says. “We were able to realize some exits in 2003 in a slow IPO market because we bought attractively in 2001 and 2002…[when] we were able to find deals at prices that made sense.”
The firm hit three separate exit routes in order to find liquidity, relying on outright sales, initial public offerings and partial block sales of already public companies.
Of note, the firm completed a $685 million sale of Internet airline-ticket vendor Hotwire to InterActiveCorp and also exited its IT services platform Crystal Decisions in an $820 million sale to Business Objects. TPG capitalized on demand in the public markets with the roughly $221 million floatation of reinsurer Endurance Specialty Holdings, and also consummated a number of block sales, including realizations of MEMC Electronic Materials, Punch Taverns, Globespan and Petco Supplies.
“IRRs are nice, but actually getting your money back is always better,” Coulter says. “We try to return profits quickly and aggressively…Our realizations last year were indicative of our firm’s turnaround mentality. We’re not just playing in auctions and high-priced situations; we’re also value investors, and that strategy in the 2000-through-2002 timeframe put us in position to see some great realizations last year.”
TPG Carries Its Weight
While there could be some debate whether 2003 was a buyer’s or seller’s market, few could claim that the fund-raising environment had turned the corner. In a year when U.S. private equity firms closed on only $24 billion, Texas Pacific Group was able to raise $4.7 billion for its TPG Partners IV fund, representing almost 20% of the total funds raised by all buyout firms. TPG officially closed the fund in January of this year at $5.3 billion.
While Coulter credits TPG’s fund-raising success to market timing, there’s no question the firm’s track record and recent history certainly made investors more eager to commit. And even as the fund now represents the third-largest LBO vehicle in the U.S., the firm finished fund raising oversubscribed, leaving some investors on the outside looking in.
“We take the mentality that when it feels good it’s probably bad, and that works in reverse,” Coulter says. “We often find that we’re usually out of the cycle, but when finding values and raising funds, that’s not necessarily a bad thing.”