TPG Partners V, L.P. (“TPGV”) is being formed by the principals (the “Principals”) of Texas Pacific Group (“TPG”) primarily to make significant investments in operating companies through acquisitions and restructurings.
TPG is one of the largest private equity managers in the world. Since its inception in August 1992, TPG has raised over $13.5 billion of investment capital through its prior funds: TPG Partners, L.P. (1993) (together with parallel investment entities, “TPG I”), TPG Partners II, L.P. (1997) (together with parallel investment entities, “TPG II”), TPG Partners III, L.P. (1999) (together with parallel investment entities, including T3 Partners, L.P. and T3 Partners II, L.P., “TPG III”) and TPG Partners IV, L.P. (2003) (together with parallel investment entities, “TPG IV”). TPG was founded by David Bonderman, James G. Coulter and William S. Price.
Commencing with this Fund, Mr. Price will assume the role of Partner Emeritus of TPG, but will remain active in certain matters for TPG, including in particular, matters relating to the TPG Operating Group. He will not sit on the Investment Review Committee for TPG V.
Since 1985, TPG and its Principals have had lead responsibility for 90 investments. These investments have generated the following results:
- Realized Returns – Sixty-seven of these investments are either realized or publicly-traded and have generated value of approximately $20.1 billion on approximately $7.2 billion of equity invested, representing a 55% gross internal rate of return (“IRR”) and a 2.8x multiple of money invested.
- Distributions to Investors – Since 1985, TPG and its Principals have returned approximately $16.7 billion to their investors (against cumulative invested capital of approximately $11.5 billion), making TPG one of the few net distributors of capital among major private equity firms during this period. Since 2000, TPG has distributed more than $11.4 billion to its investors, despite challenging exit markets over most of this period.
- Relative Returns – Investments made by TPG and its Principals have outperformed the public markets by 54% during the period from 1985 to the present, consistently exceeding hypothetical returns generated by investing in the public market.
- Multiple Cycles and Multiple Industries – These investments have been made through several economic cycles and across a broad spectrum of industries in the United States and Europe. TPG and its Principals have employed multiple investment formats in these transactions, including public tender offers, divisional spin-offs, bankruptcy reorganizations and strategic minority investments.
TPG V will continue to employ the investment strategy successfully practiced by TPG and its Principals over the past 20 years. TPG’s operating skill set, global reach and depth of expertise across a range of industry sectors, together with its value-oriented investment style, distressed investing skills and proprietary deal sourcing capabilities, are particularly well suited to the current investment environment and differentiate TPG from other private equity investors.
Four key elements differentiate TPG’s investment strategy from its competitors: (i) an operational value-added strategy of enhancing portfolio company operating performance following investment, (ii) global reach and depth of experience across a number of industry sectors, (iii) a value-oriented investment approach and (iv) participation in operational and financial distress situations. These elements will enable TPG to construct a portfolio that is different from those of other private equity investors.
Operational Value-Added Investing
Deal skills and investment judgment are no longer the only tools necessary to achieve outperformance in the private equity industry. The ability to add value to portfolio companies following an investment has become a requirement for successful private equity investing, both in the United States and Europe. The value-added approach employed by TPG and its Principals, which began with the investment in Continental Airlines, Inc. (“Continental”), is an effective and necessary tool in enhancing the performance of portfolio companies, transforming them through the employment of creative operational and financial strategies at various stages in their evolution. TPG’s ability to identify potential “transformational” strategies early in the investment process has been a key factor in sourcing, negotiating and structuring many of its investments.
The Operating Group is an integral component of TPG’s investment strategy and a source of competitive advantage. The Operating Group, which TPG has built over many years, consists of 15 core management professionals, who partner with TPG’s investment professionals. The Operating Group has enabled TPG to exert influence at many levels of portfolio company management. Former members of the Operating Group currently fill key executive roles at TPG’s portfolio companies, including CEO and CFO positions. The Operating Group professionals generally have had experience in corporate management and management consulting. While integrating high-impact, operationally-oriented professionals with an investment team can be challenging. The benefits are substantial, both in improving due diligence and in driving superior portfolio company performance.
TPG’s operational value-added skill set is generally applied to two types of activities: turnaround investments and transformational investments.
Turnaround transactions have historically been a hallmark of TPG’s investment strategy. In TPG’s experience, many private equity investors and strategic acquirers are unwilling or unprepared to take on investments in companies that face significant financial or operational challenges, particularly if senior management changes are required. Consequently, TPG has been able to execute turnaround investments at “value” pricing, often with little or no competition. Some of the turnaround investments made by TPG or its Principals include:
- Burger King Corporation. TPG, along with other co-investors, acquired Burger King Corporation (“Burger King”) in December 2002, following several years of declining profits and market share at the fast food giant. Soon after the acquisition of Burger King from Diageo plc for $1.5 billion, TPG placed four members of its Operating Group and two deal professionals into key management positions, including Executive Chairman and Chief of Staff. In 2003 and 2004, TPG hired an entirely new management team, including former Continental executive and turnaround specialist Gregory Brenneman as CEO, and ultimately replaced 16 top executives. These changes have led to the improvement of key performance metrics, including drive-thru speed and customer satisfaction, and a sharp reduction in the number of underperforming restaurants.
- Oxford Health Plans, Inc. In June 1997, weak financial systems driven by rapid growth and weak management controls led to a significant earnings restatement and impending liquidity crisis at Oxford Health Plans, Inc. (“Oxford”). TPG invested $283 million into Oxford and acted as a catalyst for an additional $350 million in debt financing. TPG installed a new CEO and nine senior managers and helped the company exit unprofitable non-core markets, lower its medical loss ratio and reduce overhead costs, while improving financial systems and service levels. TPG fully exited its investment in February 2002, realizing approximately $594 million or a 2.1x multiple of money invested.
- Continental. Airlines pose significant operational complexities. The investment in Continental was made in the economic trough of 1992 on the theory that if numerous changes were successfully negotiated and executed, the airline could be an attractive vehicle through which to participate in the recovery of the U.S. economy. At Continental, this involved financial rationalization of lease structures and overall asset management, followed by renegotiated labor structures to the ultimate benefit of most constituents. Another element of this turnaround was the redesign of the carrier’s route and hub structure and the shedding of second-tier hubs, while rapidly expanding promising locations. The most challenging part of turning around Continental was revolutionizing its culture and the way the company transacted business. Continental had a net operating loss of $174 million in 1994, but its net income grew from $215 million in 1995 to $387 million in 1998. The investment in Continental generated returns of approximately $697 million on approximately $66 million of equity capital invested and a gross IRR of 79%.
In addition to tackling the more traditional turnaround challenges of portfolio companies by revamping their management and operations, TPG has been actively involved in redirecting or expanding the strategic direction of portfolio companies in order to enhance total enterprise value. Examples of transformational investments made by TPG include:
- Debenhams Limited. During the bidding process for this U.K. department store, TPG, together with other co-investors and in conjunction with a buy-in management team, identified significant operating improvements, as well as the opportunity to extract value from the company’s extensive real estate holdings. Since the acquisition in December 2003, the buy-in management team has rapidly transformed the company and has realized £110 million of operating improvements. Through a combination of these savings and an efficient real estate financing and subsequent sale and leaseback, TPG refinanced the company’s debt in May 2005 and received an $871 million dividend on its initial $410 million investment (a multiple of over 2.1x) while retaining its original equity interest.
- Punch Group/Spirit Group Limited. TPG acquired Punch Taverns and the pub business of Allied Domecq plc in September 1999 through two simultaneous transactions that, in the aggregate, constituted the largest European leveraged buyout to that date. In 2002, TPG de-merged the 4,400 leased pubs (Punch Group) from the 1,035 managed pubs (Spirit Group Limited), and Punch Taverns plc (the successor to Punch Group) was floated on the London Stock Exchange. While a management team was recruited, TPG’s Operating Group provided an interim president for both businesses and a CFO for Spirit Group Limited (“Spirit Group”). TPG led a systematic effort to upgrade the estate, including driving food sales and focusing on the quality of its retail offerings. In November 2003, Spirit Group acquired the managed pub, lodge and restaurant business of Scottish & Newcastle plc for £2.5 billion, creating the United Kingdom’s largest managed pub operator. After integrating the two businesses, selling non-core assets in a series of transactions and performing a major refinancing in January 2005, TPG sold its shares in Spirit Group to Punch Taverns plc in January 2006. Including proceeds previously received from the sale of its shares in Punch Taverns plc and the refinancing of Spirit Group, TPG realized over $1.0 billion on its investment of $377 million.
- Lenovo Group Limited. In May 2005, shortly after the announcement of Lenovo Group Limited’s (“Lenovo”) agreement to acquire IBM’s personal computer business, TPG, alongside its Asian affiliate, Newbridge Capital, LLC (“Newbridge Capital”), invested $209 million in the combined company. Following the investment, a member of TPG’s Operating Group was embedded virtually full-time in Lenovo to spearhead the integration and restructuring (which targets cost reductions of $800 million by the end of 2006). The merger was accretive to Lenovo’s shareholders in the first full quarter of combined operations, and Lenovo has shown continued overall revenue and profit growth since TPG’s investment.
Global Reach and Sector Depth
The recent growth in private equity deal volume has been due, in part, to the expansion of the geographic and industry footprint in which private equity funds operate. TPG has a long history of investing outside the United States and its worldwide network and the specialized industry knowledge and relationships it has developed in a wide range of industries give it a competitive advantage over many other private equity firms.
Due to an increase in global integration, very few large-scale businesses are purely domestic in nature. For example, the regional revenue breakdown of TPG’s portfolio companies, together with those of Newbridge Capital, is approximately 66% in North America, 25% in Europe and 9% in Asia. Consequently, due diligence and understanding of European and Asian operations are critical when underwriting many U.S. investment opportunities.
Since making its first European investment in 1995, TPG has grown to become one of the most active private equity investors in Europe, having executed transactions valued at approximately $25 billion in the past 10 years. Significant transactions include the acquisition of Punch Taverns and the buyout of the pub business of Allied Domecq plc, the merger of Spirit Group with Scottish & Newcastle’s pub business and investments in Findexa Limited, Gemplus International S.A., Ducati Motor Holding S.p.A., TIM Hellas Telecommunications S.A., Mobilcom AG and Debenhams Limited (“Debenhams”). TPG’s 19 professionals in Europe provide local expertise in sourcing and executing transactions. By pursuing North American and European opportunities through a single fund, the local professionals are able to take advantage of TPG’s deep, time-tested industry and operating expertise and seasoned investment review committee process. This structure enables TPG to continuously weigh the relative risks and rewards of opportunities in Europe and North America, rather than be limited by market cycles.
Beyond North America and Europe, TPG will have the ability to take advantage of opportunities in Asia, although investments outside the United States, Canada and Europe will be limited to 15% of the aggregate commitments of TPG V. Historically, TPG has targeted the Asian market through a joint venture with Newbridge Capital, an investment firm co-founded in 1994 by David Bonderman and Richard C. Blum. Over the past decade, Newbridge Capital, through its well-established network of dedicated investment professionals, pioneered a control-oriented investment style in Asia. In 2005, TPG began an integration process to establish a closer relationship with Newbridge Capital, with the goal of creating a unified management team and combining the scale, resources and experience of TPG with the hands-on local experience of Newbridge Capital in Asia. Newbridge Capital now utilizes TPG’s centralized investment review committee process, while further benefiting from TPG’s industry and operating skill set. Newbridge Capital has 30 dedicated professionals based in its offices in San Francisco, Hong Kong, Fort Worth, Melbourne, Mumbai, Seoul, Shanghai, Singapore and Tokyo. The close working relationship between TPG and Newbridge Capital is exemplified by the Lenovo transaction, in which Newbridge Capital’s reputation and experience in Asia, as well as the transformational abilities of TPG’s Operating Group, played a critical role.
Industry Sector Depth
TPG’s investment approach and established relationships have led to the development of specialized industry knowledge within TPG, covering a wide range of industries, from technology to healthcare and financial services. TPG’s 14 global industry groups have enabled it to enjoy an “early mover” advantage in exploiting opportunities in sectors that remain hidden to private equity firms possessing less specific sector knowledge or weaker industry relationships and to strengthen its pricing conviction when pursuing opportunities. TPG generally focuses on industries undergoing change due to secular or cyclical forces, or which offer relative value due to capital dislocations. TPG generally rotates out of industry areas when, with the influx of additional strategic and financial capital sources, investments become more expensive.
In a buoyant market, most sectors perform well. However, in lower ambient growth conditions, such as those that TPG V may encounter, sector discrimination and selection become more important in identifying attractive investments. Two recent investments stemming directly from sector discretion are Texas Genco LLC (“Texas Genco”) and IASIS Healthcare LLC (“IASIS”).
- Texas Genco. TPG’s investment in Texas Genco in December 2004 represented the culmination of TPG’s work in the power generation sector over the last several years. Working closely with Mr. Jack Fusco, TPG’s exclusive management partner in the sector and the former CEO of Orion Power Holdings, TPG pursued six large power generation opportunities in 2003 and early 2004. In the spring of 2004, TPG formed an investor group to back Mr. Fusco and his team in the acquisition of Texas Genco, one of the largest wholesale electric power generating companies in the United States. The TPG-led investor group purchased the low-cost coal and nuclear assets of Texas Genco at approximately 50% of replacement cost and hedged several years of forward power production at record prices at the time of signing. As a result of this hedging program, the investor group was able to achieve significant financing well in excess of initial expectations. In October 2005, less than ten months after the acquisition, the investor group announced an agreement for the sale of Texas Genco to NRG Energy, Inc. for an equity value of over $5.8 billion, providing the investor group and management a gross return of 6.5x their initial investments. This sale transaction is currently pending and expected to close in the first quarter of 2006.
- IASIS. In June 2004, an investor group led by TPG acquired IASIS, a leading owner and operator of acute care hospitals, for approximately $1.4 billion. Due to management’s disciplined, operations-focused approach, IASIS provided a particularly attractive opportunity in an industry with favorable demographic trends. Since the acquisition, the management team has continued to emphasize operations and cost management, an approach that generated a 32% increase in operating cash flow during the 12-month period ended June 30, 2005 and enabled IASIS to invest approximately $290 million of growth capital into its facility base during the 24 months prior to November 2005. IASIS continues to demonstrate strong operating momentum, as EBITDA has grown at a compounded annual rate of more than 20% for the past three years.
A key tenet of TPG’s investment strategy has been to seek “value” when determining which opportunities to pursue. The twin goals of this value-based approach are (i) to place less reliance on multiple expansion to achieve target returns and (ii) to achieve greater enterprise value resilience through periods of economic or multiple contraction than might be available with a more growth-oriented investment approach. Although TPG’s emphasis on value generally results in lower returns during periods of economic expansion (relative to returns generated by growth or momentum investment styles), value investors generally outperform growth investors during periods of low economic growth or contraction.
Two tactics that TPG has successfully employed over its history to minimize competition with other private equity buyers are its contrarian approach and its willingness to work with complexity.
TPG and its Principals have a long-standing track record of finding value that the market has overlooked. In their experience, the value “pendulum” often swings too far in both directions, creating the opportunity for attractive returns on well-timed investments. This contrarian approach continues to be effective, enabling TPG to find pockets of value even in environments of “irrational exuberance” and in the wake of market shocks. Recent TPG investments reflecting this approach include:
- PETCO Animal Supplies, Inc. Despite strong operating performance, a powerful retail concept and demonstrated growth, PETCO Animal Supplies, Inc. (“PETCO”) was trading at historically low public market valuations during early 2000, overlooked by investors who sought internet retailers, such as Pets.com. Exploiting the optimism about “e-tailing” and the resulting discount applied to “vulnerable” bricks and mortar businesses such as PETCO, TPG, together with Leonard Green & Partners, invested in PETCO in October 2000 in a going-private transaction at 5.8x trailing EBITDA. The company was taken public in February 2002. TPG’s $95 million investment has been fully realized, generating a return of $536 million, which constitutes a multiple of 5.6x its original investment and a gross IRR of 97%.
- MEMC Electronic Materials, Inc. In 2000, TPG estimates that the semiconductor industry produced roughly $30 billion more chips than were ultimately consumed, due both to overly optimistic assumptions for continued technology spending and excess inventory held by the rapidly expanding contract manufacturers. A record chip cycle collapse followed in 2001. Late that year, after months of independent research, TPG became convinced that production had plummeted to the point that excess inventory would likely burn off in at most 30 months, despite flat end-market demand. Acting on this contrarian conviction, TPG purchased MEMC Electronic Materials, Inc. (“MEMC”) in December 2001 for six dollars and provided a loan guarantee of approximately $90 million. Although end markets for semiconductors remained lackluster, production and consumption returned to a reasonable balance by the end of 2002, and MEMC generated EBITDA of approximately $95 million in the first year following TPG’s investment. MEMC has returned approximately $924 million to TPG, and TPG’s holdings are valued at an additional $708 million.
- Endurance Specialty Insurance Ltd. In 2001, the insurance sector suffered its largest catastrophic losses since Hurricane Andrew, with estimated losses of more than $20 billion. In the wake of these losses, TPG aligned with important industry partners to create Endurance Specialty Insurance Ltd. (“Endurance”), with unencumbered capital to deploy in a newly “hard” market. In Endurance’s first year of operation, it generated $102 million of net income, roughly 7% above the company’s original plan, and the company completed an initial public offering in February 2003. TPG has realized $282 million on its $150 million of capital invested to date and continues to hold a small number of warrants.
TPG’s comfort in undertaking complex situations has enabled it to minimize competition with both strategic buyers and other private equity firms. These transactions typically require long lead-times (often more than 18 months), considerable human resources and regulatory and industry expertise. Despite the significant hurdles and resources required to execute these transactions, situational and structural complexity often hides compelling values that may be more difficult for other potential acquirers to uncover. Additionally, in complicated settings, the proposals made by TPG are often opaque to other potential acquirers, making it more difficult for a bid to be “topped.” TPG’s willingness to take on complexity and ability to develop creative solutions have allowed TPG to gain access to investment opportunities at attractive prices. Examples of complex situations undertaken by TPG include:
- Continental. In 1993, in conjunction with Air Canada, the Principals, through Air Partners, led the reorganization of Continental under Chapter 11 of the Bankruptcy Code. Over a 12-month period, the Principals negotiated with various creditors, as well as with labor and governmental constituencies, while simultaneously raising the equity and debt financing for the transaction. In exchange for a total investment of $66 million, Air Partners received a 33% equity interest in Continental at a time when the airline industry was coming off a low point in the economic cycle. As a result of new management, a new strategy and creative structuring, Air Partners ultimately realized $697 million on $66 million of capital invested, with a gross IRR of approximately 79%.
- MEMC. This transaction was the culmination of 16 months of negotiations with the Germany-based seller, the U.S.-based management of the company and the Pension Benefit Guaranty Corporation. Due to the cyclical challenges and the situational complexity involved, TPG faced no direct competition for this investment.
- Eutelsat S.A. In 2004 and early 2005, TPG, in an equal partnership with Spectrum Equity Partners, acquired 22% of the outstanding shares of Eutelsat S.A. (“Eutelsat”), one of the world’s largest fixed satellite services operators. TPG purchased the shares in a series of transactions from 13 separate European government-related entities over a 15-month period. These purchases were executed at a blended purchase price of €2.65 per share, which represents a purchase multiple of 6.1x 2004 EBITDA. During the first quarter of its 2006 fiscal year (July 2005 to September 2005), Eutelsat generated revenues and EBITDA, both excluding one-time items, that were slightly ahead of projection. In December 2005, Eutelsat executed an IPO that valued the company at approximately $3.1 billion. TPG’s realized and unrealized value is approximately $450 million, representing a multiple of 2.4x its original investment.
Distressed Investing Skills
The third leg of TPG’s strategy is to participate in the restructuring of corporate balance sheets. Transaction opportunities stemming from distress and corporate selling generally involve (i) the sale of corporate divisions or subsidiaries by distressed parents or (ii) standalone restructurings of distressed companies. There are relatively few private equity firms that have experience undertaking both financial distress and operating distress. While there are many “distressed” investors that trade in the “paper” of distressed companies or make investments with a view to restructuring balance sheets, TPG is one of the few investors that makes control investments in companies experiencing both financial and operating distress. TPG seeks to minimize competition by engaging in control transactions that utilize its traditional strengths in value-oriented investing, complexity and operational enhancement.
Noteworthy distressed transactions executed by TPG and its Principals include:
- Paradyne Networks, Inc. TPG acquired this leading provider of digital subscriber line equipment in 1996 from Lucent Technologies Inc. in a complex divisional spin-off. TPG installed four new senior managers, who orchestrated an administrative and organizational restructuring, shedding Lucent overhead allocations, implementing other cost reductions and streamlining product offerings. As a result of this reorganization, within six months of the investment, Paradyne Networks, Inc. enjoyed its first profitable months (on an EBITDA basis) in five years. TPG realized proceeds of $342 million or a multiple of 6.6x its total capital invested.
- AerFi Group plc. During the liquidity crisis of the early 1990s, AerFi Group plc (“AerFi”) (previously known as Guinness Peat Aviation, plc) had undergone a near-liquidation after a withdrawn IPO, two substantial debt restructurings and the assumption by an affiliate of GE Capital of day-to-day operational control. After purchasing control through a financial restructuring in November 1998, TPG worked closely with management to realign its aircraft portfolio and to use securitization vehicles to allow AerFi to grow its fleet through acquisitions. AerFi’s assets and earnings grew quickly in the first twelve months after TPG’s investment, allowing the company to dividend back almost half of TPG’s investment amount. TPG’s cash exit in October 2000 yielded a total value to TPG of $286 million on its investment of $106 million (2.7x invested capital), representing a gross IRR of 81%.
- Isola Group S.àr.l. In June 2004, TPG acquired Isola AG, now organized as Isola Group S.àr.l. (“Isola”), a leading manufacturer of glass epoxy laminates for printed circuit boards, as part of its parent’s corporate reorganization. After tremendous growth during the late 1990s, the laminates market suffered a downturn between 2000 and 2003. However, TPG’s experience in the cyclical electronic materials sector, combined with its strategic partnership with Redfern Partners, an investment group with valuable industry knowledge, enabled TPG to anticipate a strong recovery in the short to medium term. After identifying significant opportunities for operational improvement, TPG completed due diligence and negotiations over a relatively short period of time. As a result, TPG faced a low level of competition and purchased Isola for a multiple of 0.3x revenues and 4.4x EBITDA. Since the acquisition, Isola has played a critical role in consolidating the industry. In December 2005, Isola announced a definitive agreement to acquire Polyclad Laminates, Inc. (“Polyclad”), the second biggest manufacturer of glass epoxy laminates for printed circuit boards. The acquisition of Polyclad will (i) provide significant cost synergy potential for Isola, (ii) bring about capacity rationalization and consolidation to mitigate industry overcapacity and (iii) help to improve Isola’s product mix and to expand into new regions such as Southern China. Subject to regulatory approval, the acquisition of Polyclad is scheduled to close in the first half of 2006.
Although (i) current macroeconomic conditions are relatively robust in the United States and Europe, (ii) default rates for high-yield debt are low and (iii) liquidity is generally abundant, the United States and Europe will likely be moving into a late-cycle environment during the commitment period of TPG V. Distressed investing may represent a material portion of the equity investments of TPG V. TPG’s experience in successfully managing companies through the bankruptcy process, negotiating agreements among sets of disputing creditors and allowing management to effectively run their business distinguishes TPG in the private equity industry.
Building a Differentiated Portfolio
TPG employs various “differentiators” in pursuing, executing and operating its investments. As described above, these include TPG’s operating skill set, sector depth and selection, distress experience, value orientation, international capabilities and innovative transaction sourcing. The primary purpose of these differentiators is to build a portfolio of companies whose composite risk and reward is both attractive and differentiated from other private equity firms’ portfolios.
TPG expects to diversify its portfolio across three transaction types: (i) investments in stable, well-managed companies with steady cash flows (so-called “steady state” transactions), (ii) transformational buyouts and turnarounds involving substantial operational and financial improvements in the target company and (iii) transactions where innovative sourcing and structuring are used to unlock the value in investment situations that are “off the beaten path,” meaning they are proprietary or have not been exposed to the investment market at large. By assembling a portfolio in this manner, TPG can achieve higher risk-adjusted rates of return than many of its competitors. Investments in transformational buyouts and “off the beaten path” investments have represented approximately 38% and 39%, respectively, of the investments made by TPG since TPG’s inception. This diversification strategy helps to reduce the correlation between investment performance and the macroeconomic cycle, as well as to set TPG’s performance levels apart from those of other private equity firms.
An example of a recent “steady state” investment by TPG is The Neiman Marcus Group, Inc. (“Neiman Marcus”).
- Neiman Marcus. TPG (together with Warburg Pincus) acquired Neiman Marcus in October 2005 in a $5.4 billion going-private transaction backed by Neiman Marcus’ strong management team. The transaction was funded in part by the sale of Neiman Marcus’ credit card operations to HSBC. As one of the premier luxury retailers in the United States, Neiman Marcus currently operates 35 full-line stores, two Bergdorf Goodman stores and a high growth direct-to-consumer business including catalogs and e-commerce websites. Neiman Marcus has achieved excellent financial results over a long period of time, with revenues and EBITDA growing at a compounded annual rate of 7% and 10%, respectively, over the last decade. Net of cash on the balance sheet and proceeds from the sale of Neiman Marcus’ credit card operations to HSBC, the acquisition valued the company at 8.6x trailing EBITDA, an attractive multiple relative to public market comparables and precedent M&A transactions. Since the company’s fiscal year end in July 2005, comparable store sales have continued to exhibit strong growth, up 7% in the five months ended December 31, 2005.
TPG’s most successful transformational buyouts will require careful analysis throughout the investment lifecycle, beginning with investment sourcing and negotiation. Transformational capabilities, when identified and explored prior to an investment, may enable TPG to enter investments on favorable terms when compared to competing bidders. Once an investment has been made, TPG’s ability to rapidly deploy members of its Operating Group and recruit strong managers with the right mix of skills for a given situation will differentiate TPG from other private equity firms.
- Debenhams. Following the purchase of Debenhams in 2003, TPG and its co-investors installed a new management team, which was able to significantly restructure the company, realizing £110 million in operating improvements and raising £490 million through a sale and leaseback. These changes and management’s focus on generating cash have effectively reduced TPG’s buy-in multiple from 7.1x to 4.0x EBITDA. TPG has already realized 2.1x its original cost while retaining its original equity interest.
TPG’s established relationships, global reach and opportunistic approach to industry specialization will be key factors in sourcing and executing transactions that have not been made available to the market at large or are “off the beaten path.” Over many years, TPG has cultivated extensive networks in a variety of industries and geographic regions. These relationships, together with TPG’s deep industry knowledge across multiple sectors, have frequently allowed TPG to identify investment opportunities that may have seemed unattractive to other potential acquirers. TPG’s relationships, which span geographical regions and diverse industry sectors, have helped TPG to source many proprietary investment opportunities. These “off the beaten path” transactions have accounted for 30% of TPG’s investment activity by volume over the past 24 months.
- Lenovo. In early 2004, IBM approached TPG to explore the acquisition of IBM’s personal computer division. TPG (the only private equity firm contacted) promptly submitted an offer to acquire the division. IBM ultimately decided to sell the business to Lenovo and, shortly after the announcement of the sale, IBM and Lenovo approached TPG on a proprietary basis to invest in the combined company. TPG’s proprietary access to this landmark transaction arose, in TPG’s opinion, due to its expertise in technology investing and corporate carve-outs, as well as its established track record of working with corporate partners. TPG’s affiliation with Newbridge Capital provided further advantage, given Newbridge Capital’s long experience of successfully investing in Asia and China.
- Fidelity Information Services, Inc. TPG’s participation in the leveraged recapitalization of Fidelity Information Services, Inc. (“FIS”) began through its relationship with Mr. Bill Foley, CEO and Chairman of Fidelity National Financial (“FNF”). TPG and Mr. Foley explored a number of possible transactions and ultimately agreed that the information services business within FNF was undervalued by the public markets. TPG helped to design a “subsidiary leveraged recapitalization,” in which TPG and other investors would acquire a 25% interest in FIS, FNF’s information processing subsidiary, while leveraging the entity to unlock value in the business that the market had not fully recognized. The new subsidiary is an industry leader, serving a significant number of the top 50 U.S. banks and more than 3,600 small and mid-sized U.S. financial institutions. During the third quarter of 2005, FIS announced a stock-for-stock merger agreement with Certegy, another financial industry service provider. With good potential for synergies, the Certegy merger has already valued TPG’s equity holding at over 2.0x TPG’s original investment.
The investment environment continues to be very favorable for private equity investing, but that changes in the near future may require private equity firms to utilize diverse and flexible tools. TPG’s skill set as a transformational investor, together with its global reach and industry sector depth, will distinguish it from other private equity firms in the changing market. In addition, TPG will continue to seek opportunities to exploit its long-standing “value” investment style. TPG’s disciplined application of its capabilities across industry sectors, geographies and investment styles, together with TPG’s rigorous, centralized decision making and portfolio development, will enable TPG V to achieve attractive investment returns.
Management of the Partnership
TPG consists of over 70 professionals with backgrounds in the consulting, accounting, investment banking and legal professions, in addition to extensive experience across numerous industry sectors. These professionals have led investments in the technology, telecommunications, transportation, insurance, healthcare and consumer product industries, among others, both in the United States and in Europe. Biographical sketches of the senior TPG professionals are provided below.
David Bonderman – Mr.Bonderman is a founding partner of TPG and Newbridge Capital. Prior to forming TPG in 1993, Mr. Bonderman was Chief Operating Officer of the Robert M. Bass Group, Inc. (now doing business as Keystone, Inc.) in Fort Worth, Texas. Prior to joining Keystone, Inc. in 1983, Mr. Bonderman was a partner in the law firm of Arnold & Porter LLP in Washington, D.C., where he specialized in corporate, securities, bankruptcy and antitrust litigation. From 1969 to 1970, Mr. Bonderman was a Fellow in Foreign and Comparative Law in conjunction with Harvard University and from 1968 to 1969, he was Special Assistant to the U.S. Attorney General in the Civil Rights Division. From 1967 to 1968, Mr. Bonderman was Assistant Professor at Tulane University School of Law in New Orleans. Mr. Bonderman graduated magna cum laude from Harvard Law School and was a member of the Harvard Law Review and a Sheldon Fellow. He is also a Phi Beta Kappa graduate of the University of Washington in Seattle. Mr. Bonderman serves on the Boards of Directors of CoStar Group, Inc., Burger King Corporation, IASIS Healthcare LLC, Metro-Goldwyn-Mayer Inc., Ducati Motor Holding S.p.A., Gemplus International S.A. and is Chairman of the Board of Directors of Ryanair Holdings plc. He also serves on the Boards of The Wilderness Society, the Grand Canyon Trust, the World Wildlife Fund and the American Himalayan Foundation.
James Coulter – Mr. Coulter is a founding partner of TPG. Prior to forming TPG, Mr. Coulter was Vice President of the Robert M. Bass Group, Inc. (now doing business as Keystone, Inc.) in Fort Worth, Texas from 1986 to 1992. From 1986 to 1988, Mr. Coulter was also associated with SPO Partners, an investment firm that focused on public market and private minority investments. From 1982 to 1984, Mr. Coulter was a financial analyst for Lehman Brothers Kuhn Loeb, Inc. Mr. Coulter received an M.B.A. from the Stanford Graduate School of Business. He is also a Phi Beta Kappa, summa cum laude graduate of Dartmouth College. Mr. Coulter serves or has served on the Boards of Directors of MEMC Electronic Materials, Inc., Seagate Technology, Inc., J. Crew Group, Inc., Zhone Technologies, Inc., Continental Airlines, Inc., Foster’s Wine Estates, Northwest Airlines Corporation, Oxford Health Plans, Inc., Allied Waste Industries Inc., American Savings Bank, Lenovo Group Limited and The Neiman Marcus Group, Inc. He also serves on the Boards of the San Francisco Zoological Society, the Bay Area Discovery Museum, the San Francisco Day School and Common Sense Media Inc.
William Price – Mr. Price is a founding partner of TPG. Prior to forming TPG, Mr. Price was Vice President of Strategic Planning and Business Development for G.E. Capital, reporting to the Chairman. In this capacity, Mr. Price was responsible for acquiring new business units and determining the business and acquisition strategies for existing businesses. From 1985 to 1991, Mr. Price was employed by the management consulting firm of Bain & Company, attaining officer status and acting as co-head of the Financial Services Practice. Prior to 1985, Mr. Price was employed as an associate specializing in corporate securities transactions with the law firm of Gibson, Dunn & Crutcher LLP. Mr. Price is a member of the California Bar and graduated with honors from the Boalt Hall School of Law at the University of California, Berkeley. He is also a Phi Beta Kappa graduate of Stanford University. Mr. Price serves on the Boards of Directors of Bally International AG, British Vita Unlimited, DoveBid, Inc., Gemplus International S.A., Grohe AG, IRMC Holdings, Inc. and Cranium, Inc. He also serves on the Boards of COPIA, The California Mentor Foundation and JustGive.org.
Commencing with this Fund, Mr. Price will assume the role of Partner Emeritus of TPG, but will remain active in certain matters for TPG, including in particular, matters relating to the TPG Operating Group. He will not sit on the Investment Review Committee for TPG V.
Based upon the successful track record and experience of the principals and the recommendation of PSERS’ consultant, Portfolio Advisors, staff recommends that the Board invest an amount equal to 25 percent of the committed capital, but not to exceed $200 million plus reasonable normal investment expenses, in TPG Partners V, L.P. The final terms and conditions of the investment must be satisfactory to the Investment Office, the Office of Chief Counsel, and the Executive Director.
Source: Charles Spiller, PSERS