TPG Inc.

Good morning and welcome to the TPG's second quarter 2022 earnings conference call. Currently, I'll call it listen-only mode, and following management's prepared remarks, the call will be open for your questions. If you would like to ask a question at that time, please press star 1 on your telephone keypad. If you need to remove yourself from the queue, press the pound key. At any time, if you should need operator assistance, press star zero. Please be advised that today's call is being recorded. Please go to TPG's IR website to obtain the earnings materials. I will now turn the call over to Gary Stein, Head of Investor Relations at TPG. Thank you, and, sir, you may begin.

Great. Thanks, operator. Welcome to our second quarter 2022 earnings call. Joining me this morning are John Winkelried, Chief Executive Officer, and Jack Weingart, Chief Financial Officer. In addition, our Executive Chairman and Co-Founder, Jim Coulter, and our President, Todd Susitsky, are also here with us and will be available for the Q&A portion of this morning's call. Before we begin, I'd like to remind you that this call may include forward-looking statements that do not guarantee future events or performance. Please refer to TPG's earnings release and SEC filings for factors that could cause actual results to differ materially from these statements. TPG undertakes no obligation to revise or update any forward-looking statements except as required by law. Within our discussion and earnings release, we are presenting GAAP measures, non-GAAP measures, and pro forma GAAP and non-GAAP measures, reflecting the reorganization that was completed during 2021 and immediately prior to TPG's IPO. We believe it's helpful for investors and analysts to understand the historic results through the lens of our go-forward structure, and please refer to TPG's earnings release for details on the pro forma financial information. We'll also be discussing certain non-GAAP measures on this call that management believes are relevant in assessing the financial performance of the business. These non-GAAP measures are reconciled to the nearest GAAP figures in TPG's earnings release, which is available on the company's website. Please note that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any TPG fund. Looking briefly at our results for the second quarter, we reported a gap net loss of $10 million and after-tax distributable earnings of $162 million, or 46 cents per common share. We also declared a dividend of 39 cents per share of Class A common stock, which will be paid on September 2nd to holders of record as of August 19th. With that, I'd like to turn the call over to John Winkle-Reed, Chief Executive Officer. John Winkle- Thanks, Gary, and good morning, everyone. During our prepared remarks today, I'll touch on our recent performance and discuss a few highlights across our business. I'll then turn the call over to Jack to provide more details on our financial results, followed by Q&A. We delivered strong financial results for the second quarter, despite a volatile global macroeconomic and geopolitical environment. These results highlight the momentum of our franchise, the strength of our portfolio, and the inherent growth and earnings power of our model. Our second quarter fee-related revenues of $256 million grew 43% compared to the pro forma year-ago quarter, while our fee-related earnings, or FRE, more than doubled to $102 million over the same period. This FRE growth, combined with the $60 million of performance-related revenues in the quarter, led to after-tax distributable earnings of $162 million, which more than tripled compared to the pro forma year-ago quarter. Driven by these strong results, we announced a quarterly cash dividend of 39 cents a share, representing 85% of TPG's after-tax distributable earnings. As of June 30, we had $127 billion of total assets under management, an increase of 17% year-over-year. This growth was driven by significant fundraising activity across our business led by first closings in the quarter for several of TPG's flagship funds, including TPG Capital Partners, Healthcare Partners, and Rise. In aggregate, we raised $13 billion during the second quarter, which is 120% increase versus the year-ago quarter, and we raised a record $31 billion over the last 12 months. we're pleased with the strong support we have received from both our long-standing and newer limited partners. The success of our recently completed and ongoing fundraising campaigns is a testament to our excellent track record, strong LP relationships, and best-in-class team. In addition to our robust fundraising, over the last quarter and 12 months, we invested $4 billion and $21 billion respectively and we delivered realizations of more than $4 billion and $28 billion, respectively. In aggregate, our investment portfolio generated value creation of 12% for the last 12 months, despite a 2% value decline in the second quarter. The global macro environment remains highly uncertain due to a confluence of factors, including inflationary pressures, rising interest rates, the ongoing war in Ukraine, and supply chain constraints. As long-term patient investors, we have successfully navigated TPG through a number of cycles and bouts of volatility over the last three decades, and despite the existing backdrop, our business is performing well. While we couldn't have predicted the specific timing or drivers of the current downturn, We have been preparing for the onset of a more challenging market for some time. We aggressively monetized our portfolio during an attractive valuation environment, with aggregate realizations totaling 1.3 times the amount of capital we invested over the last 12 months. Importantly, at June 30, we had $39 billion of dry powder, the largest amount in the firm's history, representing 59% of our fee-generating AUM. With this large pool of dry powder, we believe we are well positioned to deploy capital in this increasingly favorable investment environment. We expect to see more attractive investment opportunities across our core sectors and themes as sellers adapt to reset valuations and markets stabilize in the coming quarters. On the realization front, we recognized and leaned into the faulty market valuations over the last 18 to 24 months. Now that the environment has changed We will still expect to selectively monetize investments in the coming quarters. Our pace will likely moderate. We have a strong, relatively young portfolio of attractive companies, and we have a bias to remain patient and continue investing in these companies to build long-term value. I'd now like to walk you through some highlights across our business, starting with our largest platform, Capital, which had $62 billion of total AUM as of June 30th. During the quarter, our capital funds completed or announced several investments and companies, including Doc Generici, a leading European specialty pharmaceuticals company based in Milan, and the pending take private of Covetris, a leading U.S. animal health technology and distribution services platform. Both of these transactions leverage our capabilities as one of the most active and experienced healthcare private equity investors, while building on thematic areas we have studied in diligence for many years. During the quarter, we also completed the acquisition of an additional stake in Sauce Labs, a leading provider of automated software testing solutions. This is a great example of the proprietary investment opportunities we create through the connectivity among our investment platforms. Our tech adjacencies fund, TTAD, first made a minority investment in Sauce Labs in 2019 and subsequently increased its position. This relationship enabled our capital team to engage Sauce Labs and its shareholders on a proprietary basis, which led to a majority investment. In the second quarter, we also helped fund CAA's strategic acquisition of ICM, which enhanced its leadership position within the entertainment and sports industries. We first invested in CAA back in 2010, and last year we moved it into a single asset continuation vehicle to maintain our majority ownership of this high-quality business. For the quarter, our capital funds generated total realizations of approximately $2 billion, including a partial sale and recapitalization of TPG Asia's investment in Green Cross, Australia's largest pet care company. Next, our growth platform at $21 billion of total AUM at the end of the second quarter. As discussed, we have built our growth portfolio with a focus on sectors and themes like healthcare IT, digital transformation and security and infrastructure, where secular rather than cyclical growth drives performance. We are investing in well-established companies with strong financial profiles, and our investments are often through structured securities that provide some form of downside protection. The growth platform had an active deployment quarter, including the completion of our investment in Morose Savali, a leading global provider of shareholder engagement and corporate governance services, In addition, consistent with our hands-on approach and focus on bending the curve to drive transformational growth, we funded several strategic portfolio company acquisitions, including Kaseya's Take Private of Datu to further scale as a leading provider of back-office infrastructure software, Denali's acquisition of Imperial Western Products to bolster its leadership position in organic waste management, Asia Healthcare Holdings' acquisition of Dr. Agarwal's Healthcare, India's largest provider of eye care services, and People 2.0's acquisition of Brookson, a leading compliance and services platform for freelancers in the UK. During the quarter, we returned capital to our growth platform investors through several transactions, including partial monetizations for Freedom Pay and Asia Healthcare Holdings. We also announced the strategic sale of Implantable Provider Group to Evelyn Health and completed the IPO of Campus Activewear in India. Campus is India's number one sports and athlete or footballer brand, and its public offering achieved the second highest subscription ever for an Indian consumer IPO at the time of pricing. Moving on, the impact platform had total AUM of $15 billion as of June 30. During the quarter, our impact funds deployed capital in a number of transactions, such as Intersect Power, a leading integrated renewable energy platform, Summit Carbon Solutions, which is developing one of the largest carbon capture and storage systems in North America, Beta Technologies, which is developing electric aircraft capable of vertical takeoff and landing, and International Medical University, which operates medical colleges in Malaysia. I'd also note the Inflation Reduction Act is expected to stimulate substantial investment in climate-related technologies and solutions. which should provide a tailwind to some of our existing rise and rise climate portfolio companies and also create attractive investment opportunities going forward. Our real estate platform, which ended the second quarter with $20 billion of total AUM, had a substantial realization in the quarter, the sale of the remaining assets in ICON, which was our warehouse and logistics development venture in the UK. On the deployment side, the real estate platform continues to add new investments at a measured pace, primarily across our student housing, rental housing, and life science themes. Before I turn the call over to Jack, I'd like to touch on our talent strategy, which is an integral component of TPG's culture. We remain focused on recruiting and retaining best-in-class talent. We recently announced mid-year promotions for more junior members of our investment team across six offices and five business units, and nearly 50% of these promotes identify as diverse. We also held our annual partner promotions, and this year's process was as rigorous and engaging as ever. Our successful partner candidates represented four offices globally and five different business units, and since 2019, 40% of our new partners have identified as diverse. During the quarter, our most senior leaders and I hosted our annual Diversity, Equity, and Inclusion Town Hall. This firm-wide event is an important time for us to come together as a global firm provide updates on our DEI strategy and progress, and keep ourselves accountable as we continue to build our firm. I'd also like to highlight that today we published our annual environmental, social, and governance review, which is available on our website. This report underscores TPG's commitment to advancing ESG performance within the firm and across our broader ecosystem and communities. Lastly, I'm also pleased to note that we recently added Gunther Bright as a new independent director to our board. Gunther is a distinguished leader who has delivered exceptional results as an executive at American Express, a former board member at McAfee, and member of various nonprofit boards. We're confident that his breadth of experience and leadership talent will enhance our board. I'd now like to turn the call over to Jack so he can take you through our financial results. Thanks, John, and good morning, everyone. I'll briefly walk through our financial results and highlight some of the more significant points regarding our second quarter performance. Our total assets under management from $108 billion at the end of the second quarter of 21 to $127 billion as of June 30th of this year. The key drivers of the 17% increase were the $31 billion of capital raised that John mentioned, combined with $15 billion of value creation from our underlying fund investments, partially offset by $28 billion of realizations that were returned to our fund investors during the same period. Fee-earning AUM increased from $52 billion at June 30th, 21 to $67 billion at June 30th, 22. This 28% increase was driven primarily by raising nearly $17 billion in fee-earning capital across our platforms, most notably in real estate and impact. Additionally, pro forma for the recent activation of our next flagship capital and healthcare partners funds, which I'll discuss momentarily, our fee-earning AUM is now $73 billion, which is a 39% increase compared to the second quarter of 21. At June 30th, approximately 84% of our AUM and 77% of our fee-earning AUM was in either perpetual or long-dated funds. with a duration at inception of 10 years or longer. In addition, 80% of our fee-earning AUM had a remaining duration of five or more years at the end of the second quarter. We had nearly $16 billion of AUM subject to fee-earning growth, including more than $13 billion not yet earning fees at the end of the second quarter. Despite the challenging macroeconomic environment, the fundamental performance of our portfolio companies remains strong, with aggregate revenue and EBITDA growth well above market, which we believe is a result of our hands-on approach and thematic sector-based investing in areas with secular growth trends. This strong performance partially offset the declining multiple environment in the quarter, leading to a valuation decline of 2%. Looking at our income statement, we recorded a GAAP net loss for the second quarter of $10 million. Regarding our non-GAAP results, we reported fee-related revenues for the second quarter of $256 million and FRE of $102 million. Our FRE more than doubled versus the pro forma year-ago quarter, driven by a combination of top-line growth in management fees and the ongoing expansion of our FRE margin. Our FRA margin was 40% for the second quarter, up from 38% in the first quarter of this year. As we've indicated previously, we expect continued FRA margin expansion as we scale our business and drive operating leverage, with an FRA margin target of 45% by the end of next year. Our after-tax residual earnings were $162 million, which was more than three times the pro forma year-ago quarter, driven by the growth in FRE and by realized performance allocations of $60 million in the second quarter. Turning to the non-GAAP balance sheet for TPG Operating Group, as of June 30th, which is reflective of our balance sheet-like business model, we are well capitalized with $585 million of cash and $450 million of long-term debt. In July, we also upsized our undrawn credit facility from $300 million to $700 million, to provide us with additional financial flexibility. We also had a net accrued performance allocation balance, which represents the 20 percent allocation to the TVG operating group, of $677 million. This decreased from $796 at the end of the first quarter, driven by a $60 million of realizations and a $60 million unrealized non-cash decline in mark-to-market valuations. A notable component of our performance allocation balance as of June 30th is related to the sale of Wind River, which we've discussed on previous calls. This transaction is currently under regulatory review, and we are now targeting a closing by year end. I'd also like to note that as of June 30th, $114 billion, or 90% of our total AUM, was eligible for performance allocations. On fundraising, we delivered an exceptional quarter with $13 billion of capital raised and a record $31 billion raised over the last 12 months, despite headwinds across the industry. I'd like to provide you with a bit more detail and an update regarding additional fundraising post-quarter end. I mentioned on our last call that we expected to hold first closes for three funds around mid-year, our flagship TPG Capital, healthcare partners, and RISE funds. In all three cases, we held rolling first closes that began at the end of the second quarter and finished after quarter end. On TPG Capital and Healthcare Partners, where we've articulated a combined target of $18.5 billion, we closed on $8 billion during Q2, as you saw in the earnings release, and another $2.7 billion in the past month, bringing the combined first close to $10.6 billion. On rise, where we've articulated a target of $3 billion, we closed on $1.3 billion during Q2 and another $300 million in the past month, bringing the total first close to $1.6 billion. On the TPG Asia front, as I mentioned on our last call, we expect to complete our first close this quarter, Q3, and we'll have more to report on this during our next earnings call. On our real estate platform, we raised $2.3 billion for our fourth opportunistic real estate fund in the second quarter. We have reached the hard cap for this fund, and we expect to complete fundraising this quarter with our internal capital commitments at a total fund size of approximately $6.8 billion. Finally, a comment on the timing of activation of TPG-9 and healthcare partners. We had not activated these funds as of June 30th. which is why the $8 billion does not show up in our fee-earning AUM numbers at quarter end. Since then, we finished investing TPG8 and Healthcare Partners One, so we have now activated the new flagship funds as of mid-July. While the remainder of our fundraising campaigns may be extended for reasons that have been well-discussed across the industry, we are very pleased with our strong start, and we look forward to updating you on our continued progress in future quarters. Taking a step back, we are proud of our strong second quarter results and the momentum we're generating across our business. We believe our investment portfolios are performing well amidst the volatile market backdrop, and we're working closely with our portfolio companies to build long-term value. In addition, we continue to expect strong growth in fee-generating assets under management and fee-related earnings as a result of our ongoing broad-based fundraising campaigns. With that, I'd now like to turn the call back over to the operator so we can take your questions.

At this time, if you would like to ask a question, please press star 1 on your touchtone phone. You may remove yourself from the queue at any time by pressing the pound key. Once again, that is star 1 to ask a question. And our first question will come from Craig Siegenthaler with Bank of America. Your line is open.