TPG Inc.

Good morning and welcome to the TPG's second quarter 2023 earnings conference call. Currently, all callers have been placed in a listen-only mode, and following management's prepared remarks, the call will be opened 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 star 2. To get to as many questions as time permits, we ask that you please limit yourself to one question. 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 you may begin, sir.

Great. Great. Thanks, Chelsea. Welcome, everyone. 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 Szczycki, are also here and will be available for the Q&A portion of this morning's call. I'd like to remind you 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'll be discussing certain non-GAAP measures on this call that we believe 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 our 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 gap net income attributable to TPG Inc. of $27 million and after-tax distributable earnings of $96 million, or 26 cents per share, of Class A common stock. We declared a dividend of 22 cents per share of Class A common stock, which will be paid on September 1st to holders of record as of August 18th. With that, I'll turn the call over to John.

Thanks, Gary. Good morning, everyone. begin with an update on angelo gordon and our ongoing work to prepare for integration and to position ourselves to maximize the opportunities for the combined platform i'll then share my thoughts on two areas within our core business where we have seen substantial activity and progress the first is investment activity consistent with the observations i made in our previous earning calls regarding our building pipeline it feels to us that the market has settled into an attractive period for deploying capital across primary and secondary private equity real estate, and impact investing. As I'll describe, our teams are capitalizing on the opportunity and have announced or closed a number of interesting and distinctive deals. The second is organic growth. I've previewed several of our organic growth initiatives with you over the past few quarters, and I'm pleased to update you today on the meaningful progress we have made in fundraising, team building, and investing across these opportunities. On Angela Gordon, we received HSR clearance in July and are anticipating additional required government approvals in time for our expected closing in the fourth quarter. Our overall integration planning effort has two objectives. The first is operational readiness, and the second is business integration and revenue growth. More than 150 people across our two firms are involved in integration planning. Well in advance of signing the transaction, we stood up seven working groups focused on critical areas such as capital formation, people and culture, and firm operations. Each group is co-led by senior TPG and Angela Gordon leaders and includes representatives from various business units and functions. Given the complexity of integrating our service functions, including finance and accounting, IT and operations, we established a dedicated integration management office to bring project management rigor and expertise to those activities. On the revenue synergy and growth side, we stood up a senior team that is fully dedicated to identifying opportunities to leverage the combined power of our platforms. The group, which includes more than 20 business leaders from Angela Gordon and TPG, is scoping and fleshing out a series of combined growth initiatives and building execution plans around each one. While we are still in early innings, we believe the opportunity set is even larger than we anticipated. We're prioritizing among those opportunities and preparing to execute in the quarters after closing. Overall, our working groups have made considerable progress on their objectives. Importantly, these working groups have also become a forum for engagement and relationship development between TPG and Angela Gordon. From my seat as CEO, I've been encouraged to see how naturally our teams have engaged with one another and the clear compatibility of our cultures. I've grown even more confident around the scope of the opportunity for our combined firm post-closing, and there's a clear sense of momentum and collective enthusiasm. The connectivity and shared purpose across our firms is tangible and exciting. At the same time that we've been working toward closing the Angela Gordon acquisition, we've been very active in our core business, and I want to provide you with an update on the strong progress we've made across several areas. On our last call, we noted that our transaction pipelines have begun to pick up considerably, and that trend has continued to accelerate. From our perspective, a few key factors are driving more favorable investing conditions. First, the bid-ask spread among buyers and sellers has narrowed despite continued market volatility. After a prolonged period of buyers and sellers viewing the world too differently to bridge valuation gaps, sellers are increasingly showing more willingness to adjust valuation expectations in order to consummate transactions, including in some cases whole company take privates. We anticipate this trend will continue into the back half of the year. Second, corporates have become significantly more active in restructuring their portfolios, pursuing acquisitions, and divesting certain assets. Given the amount of time we spend working with strategics on relationship building and proactive sourcing, our activity around carve-outs and structured partnerships has picked up meaningfully. And third, many GPs are searching for ways to appropriately return capital to their fund investors, which is helping to increase the flow of attractive investment opportunities. This dynamic has driven both new investments as well as opportunities for us to invest in our existing portfolio companies to grow and strengthen their positioning in their respective markets. Our style of private equity investing, which focuses on transforming high-quality companies and accelerating growth, is particularly well-suited for the environment in which we are operating. In particular, we have spent years building ecosystems of knowledge and relationships and developing conviction in the sectors, themes, and companies into which we want to invest. Accordingly, when actionable opportunities arise, we move nimbly and with the confidence of our full partnership to lean in. We've also established a strong track record in building high-growth strategic businesses and in structuring win-win relationships with corporate partners. Many of our unique strategic investments, such as our partnership with Amerisource Bergen to acquire One Oncology, which we closed this past quarter, are distinctive within the realm of private capital. Recent activity in TPG Capital, our flagship buyout fund, highlights our investment style and ability to capitalize on the attractive environment. Among our recent deals are three corporate carve-outs, a proprietary partnership with a unique put-call arrangement, and a take-private we just announced. Last week, we signed a definitive agreement to acquire New Relic in a $6.5 billion take-private transaction. New Relic is a leading provider of cloud-based application performance management and observability software, which has been a long-running thematic focus area for our software and enterprise technology team, given its mission-critical nature and durable growth characteristics. In June, we agreed to carve out Forcepoint's global governments and critical infrastructure business. This builds on our track record in cybersecurity and thesis on the secular tailwinds around government and commercial cyber spending. As I mentioned earlier, we closed our acquisition of One Oncology in the second quarter, which we pursued jointly with Amerisource Bergen and the excellent management team that is currently in place. Although we only closed two months ago, we're already finding compelling opportunities to expand and grow the platform. Similarly, in Capital Asia, transaction activity has increased across the region. During the second quarter, Inova Pharmaceuticals, which we acquired in late 2022, agreed to carve out Moody Pharma's consumer healthcare divisions. This is highly strategic for Inova, positioning the combined business as a leading Asia consumer healthcare platform of scale. This is a great example of how we build strong platform companies through both organic investment and targeted acquisitions. We have several other interesting deals near the finish line that we look forward to discussing with you next quarter. Consistent with our expectations, there has also been an uptick in secondaries activity as GPs globally seek strategic liquidity solutions for their best-performing assets. We are generating greater deal flow globally through NuQuest in Asia and TPG GP solutions in Europe and North America. In the second quarter, we backed continuation vehicle funds in India, Germany, and the U.S., Notably, TPG was the lead investor in the continuation fund for IU Group, one of the largest and fastest growing for-profit universities in Germany. We believe this is the largest single asset deal in Europe so far this year. This transaction was sourced through the RISE team's multi-year thematic focus on education. It's also a great example of our successful organic growth strategy, where we build new platforms on the full chassis of TPG and create shared incentives for our investment professionals to source opportunities and collaborate across business units. Finally, within real estate, we are seeing signs of an improving backdrop for deployment, and we are well positioned with $6 billion of dry powder at quarter end in our latest opportunistic fund. The significant market dislocation is creating unique opportunities for us to acquire high-quality assets that rarely become available for sale. Our pipeline continues to build as we source investments across numerous geographies and within attractive subsectors such as life sciences, data centers, industrials, and student housing. During the second quarter, we completed the acquisition of a portfolio of assets for Alloy Properties, which is our life sciences real estate platform in the Boston area. This transaction highlights how we can play offense in a tough market and build value in our portfolio companies through strategic add-ons. We were able to acquire these outstanding properties in the Boston suburbs on a proprietary basis as a direct result of our deep sector expertise. Just a few weeks ago, we closed a $1.5 billion transaction in partnership with Digital Realty Trust to recapitalize a portfolio of high-quality data center assets in Northern Virginia with more than 1 million square feet in total. The portfolio is located in one of the largest and most interconnected data center markets in the world, which also benefits from supply constraints due to structural barriers. Taking a step back and consistent with the highlights I just shared, we are seeing a notable increase in transaction activity across our platforms, and we are well positioned to continue our momentum. We deployed $2.3 billion in the first quarter, and $2.8 billion in the second quarter. And if we aggregate the investments that we have signed but not yet closed, this represents an incremental $5.5 billion of capital that will be deployed. In addition to our day-to-day focus on our core investment activities, we have also seen significant momentum across TPG in building new investment platforms with substantial growth potential. At the time of our IPO, We described how important organic innovation has been to our historic growth, and we also shared our expectation that it would continue to be a key driver for us going forward. Despite a challenging fundraising environment, we have already raised anchor capital in connection with several funds and have begun investing. Collectively, we have raised or have near-term visibility to raising more than $2.6 billion of capital for these first-time funds, and we believe each of these initiatives can drive significant and highly accretive growth for TPG over time. Our inaugural European and North American GP-led secondaries fund had a closing after quarter end, bringing total committed capital to approximately $750 million, and the fund has line of sight to reaching a billion dollars of capital. To date, the team has completed four deals out of its inaugural fund, all within sectors where TPG has deep expertise. We believe this is a market and strategy that has potential to scale meaningfully over time. Our inaugural life sciences fund, which targets earlier stage opportunities across therapeutics, medical devices, diagnostics, and innovative services, continues to raise capital and completed two investments in the second quarter. We've raised over $250 million of capital with clear momentum toward raising a $500 million fund. Turning to Treco, our private real estate credit strategy, we have visibility to raising over $750 million for the first close dedicated to this strategy, including notable anchor commitments from some of our most active relationships. And finally, we've previously discussed the considerable amount of infrastructure capital required to address climate and energy transition globally. As a result of our leadership position with our Rise and Rise Climate Funds, we see a significant amount of deal flow and believe a dedicated climate infrastructure fund will extend our unique position in this market. We are in the process of lining up anchor LPs and look forward to sharing more with you in the coming quarters. As you can see, we've made meaningful progress and reached key milestones across each of these organic growth initiatives. We feel highly confident about the trajectory of our core business With the pending acquisition of Angela Gordon, TPG is positioned to continue delivering strong performance and diversified growth for our investors. Now I'll turn the call over to Jack to review our financial results. Thank you, John, and thanks to all of you for joining us today. Our second quarter financial results were in line with our expectations and reflect broader industry dynamics and the current macroeconomic environment. All the numbers I'll be discussing are for TPG on a standalone basis and do not include Angela Gordon. We expect to publicly file a comprehensive information statement around the time of the transaction closing, which will include historical financials for Angela Gordon and pro forma financials for TPG and Angela Gordon on a combined basis. We finished the second quarter with $139 billion of assets under management, up 9% year over year. This was driven by $15 billion of capital raised and value creation of $7 billion, partially offset by $10 billion of realizations over the past 12 months. Fee earning AUM was $79 billion at the end of Q2, which grew 17% from a year ago. AUM subject to fee earning growth totaled $11 billion, of which $9 billion was not yet earning fees. Management fees totaled $257 million in the second quarter, which grew 15% year over year. As expected, transaction and monitoring fees rebounded to $17 million in the quarter, and we expect this will further normalize as our pace of deployment increases. Total fee-related revenue for the quarter was $286 million, up 8% sequentially, and 12% compared to Q2-22. We reported fee-related earnings of $125 million in the second quarter, which increased 23% year-over-year. Our FRE margin for the quarter was 44%. This margin improvement from the first quarter is a result of increased management fees, higher capital markets revenue, and continued strong expense discipline across the firm. After-tax distributable earnings for the second quarter were 96 million or 26 cents per share of Class A common stock. This was impacted by a couple of items. First, our net realized performance allocations continue to reflect our moderated pace of realizations. While we will selectively monetize investments in this environment, and we have several in process, our priority continues to be driving growth across our portfolio companies. Second, similar to last quarter, we incurred non-core expenses related to the Angela Gordon acquisition. These costs reduced our distributable earnings by $15 million this quarter. Excluding these expenses, our after-tax DE would have been $111 million or $0.31 per share of Class A common stock. Turning to our non-GAAP balance sheet, we had $578 million of cash and $450 million of long-term debt as of June 30th. Our net accrued performance allocation balance was $760 million, which represents the 20% allocation to the TPC operating group. This increased 7% from the first quarter, driven by $58 million in value creation. This value creation was a result of our aggregate portfolio appreciating 2% in the second quarter and 9% over the last 12 months. Our companies are showing continued resilience in this period of economic uncertainty, with average revenue growth over the past 12 months of 22%. Finally, on fundraising, we raised $1.5 billion during the quarter and $15 billion over the last 12 months. As you'll recall from last quarter, we updated our targets for our flagship funds given the challenging fundraising environment. We're continuing to manage our business toward these revised targets, and we're pleased with the quality and breadth of dialogue we're having with LPs. While we continue to make good progress in our LP discussions, there is a more pronounced barbell effect across the industry where the middle period of campaigns has been elongated. Therefore, we expect the remainder of our flagship fundraisers to be weighted toward the end of these processes. As we work toward completing these flagship campaigns, we're also actively engaging with LPs to capitalize the organic growth initiatives that John described. We've made tangible progress and are now actively investing in a number of those strategies. In addition, at the end of the second quarter, we began raising our sixth growth fund. Looking forward, I want to reiterate the compelling growth we see ahead for TPG. Through the addition of Angela Gordon and our various organic growth initiatives, we're entering what we believe will be the next leg of significant growth across our franchise. We're confident in our ability to generate additional fee-earning assets and build long-term shareholder value. Now I'll turn the call back to the operator to take your questions. Kelsey?