TPG recently held its annual meeting, where it reportedly entertained its investors with music from the band Dire Straits, according to an article from the New York Post.
I caught up with several investors who attended the meeting, who told me something interesting – TPG spent a lot of time characterizing itself as a middle market firm. Two LPs expressed skepticism about the description, especially as the firm’s last flagship vehicle, Fund VI, was one of the largest private equity funds ever raised at almost $20 billion (the firm later allowed investors to shrink commitments, reducing the total size of the fund by about $1 billion.)
While the firm has not launched its seventh flagship vehicle (expected next year), that fund will come in at a much lower size than its past funds. One existing TPG investor told me the firm might struggle to hit even $5 billion.
The significant reduction in fund size, whatever it ends up being, would push the firm solidly into the middle market. To be clear, TPG looks for deals for companies that require equity checks range in size from $10 million to $1 billion, according to its website. Some recent deals it closed that include financial information are Par, a pharmaceutical company the firm acquired last year for $1.9 billion, and FleetPride, a truck and trailer parts distributor, for more than $1 billion. Both deals I would consider in the upper reaches of the middle market.
TPG declined to comment, though one person who knows the firm told me the firm will consider acquisitions of all sizes in an effort to have a balanced portfolio; however, it’s been successfully targeting the middle market since 2008 and has found those returns more attractive than the mega-deals, the person said.
For several years now the world ‘mega’ has turned negative as LPs began to purge it from their vocabularies after the global financial crash. GPs responded in kind, talking about middle market opportunities where they could use more equity and less debt, where operational improvements trumped financial engineering.
One LP said TPG could be “creating confusion amongst LPs” who have always put the firm in the ‘mega’ category based on past experience, “which may get them to question the motivation for TPG to promulgate that message.”
A market source who is not an LP characterized it this way: “the middle market is sexy and hot, but this is like trying to dress up a Mastiff as a Chihuahua.”
Because of the massive size of TPG’s past funds, the firm has long been considered one of the mega-firms in the industry and it’s tough to think of TPG any other way. But recent deal activity would suggest TPG has eyes for more modest transactions these days. The size of the firm’s next flagship vehicle will answer all questions about just what kind of deals TPG can do going forward.
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