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Editor’s Letter: Getting in on good terms

I find it strange TPG Capital’s bridge fund was not drawn.

TPG last year raised TPG Strategic Partnership Interim Fund designed only for the most intimate of TPG investors. The firm raised $2 billion from, as I understand it, three LPs – the state pensions of Oregon and Washington State and a sovereign wealth fund. Those LPs got commitments into the fund on what has been described as ‘friendly terms.’

The assumption was TPG would use some of the capital to make investments and give time for Fund VI to harvest and returns to crystallize. Instead, the firm launched Fund VII around mid-year 2014. Fundraising documents went out at least by the summer, according to a Bloomberg report that cites the documents. TPG must have seen its opportunity and launched the fund earlier than expected.

Buyouts recently reported TPG has held a first close on $6.5 billion, which includes the $2 billion bridge fund capital, as well as up to $400 million commitment from the general partner. This is a strong showing for a fund that has faced challenges because of TPG’s track record in its past two funds.

TPG Fund VI, which raised $19 billion, made its final investment in late February, according to a person with knowledge of the firm. State pension boards in Washington State, which committed $600 million to the fund, and Oregon, which committed $700 million, both recently approved rolling their full commitments into Fund VII. TPG drew nothing from the bridge fund.

This brings up another question in my mind – and also one I’ve discussed with several LPs in the market: Will these bridge fund investors comprise an elite class of investors in Fund VII? Terms on the bridge fund were described by Oregon as “friendly.” If Oregon’s and Washington’s commitments roll into Fund VII on the same friendly terms (and I believe they will, but I haven’t been able to confirm that), the two LPs will seemingly be in a more advantageous position than other LPs who will pay higher fees.

Not that this sort of situation is unusual in today’s private equity market – there’s been some concern for a few years about two classes of LPs: those with money and power who get the choicest terms, seats on advisory committees and the ear of the GP, and everyone else, who pays market rates and waits for instructions to trickle down from the LPAC.

This stratification will likely only continue as LPs continue committing more money to fewer GPs, and GPs enter larger, customized relationships with big institutions like sovereign wealth funds. While small institutions will still want exposure to private equity for its promised returns, they will keep getting crowded out by the bigger, more intimate relationships.

TPG VII, targeting $10 billion, is offering juicy incentives to LPs, depending on size and speed of commitments, according to media reports. A source close to the firm told Buyouts in a prior interview the incentives “are very much in line with those being offered by other GPs, regardless of fund performance.”

That’s sort of the way it’s always worked in this industry, it’s just becoming more pronounced. TPG VII is the latest example of the creation of an elite LP class.