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September 30, 2012 10:01 pm
TPG co-founder warns on returns
By Henny Sender in Hong Kong
©Bloomberg
David Bonderman, co-founder of TPG
The co-founder of US private equity group TPG has warned that if stock markets do not improve, investors in buyout groups will have to accept lower returns.
Historically private equity groups have promised investors that they themselves will only take a cut of the profits from their investments if they achieve a minimum 8 per cent return.
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For most of its short history, the best buyout groups have had no trouble delivering. But now the industry is struggling with low returns and that 8 per cent has become a more elusive target.
“If we continue to have zero interest rates, that 8 per cent hurdle should go,” David Bonderman, co-founder of TPG said on the sidelines of a conference in Hong Kong.
“If the public markets don’t perform better, the benchmarks will have to change and people will have to adjust their expectations on returns.”
Like many other big buyout groups, TPG is trying to raise a new Asia fund at a time when investors have become sceptical about the ability of private equity to deliver big returns in the face of ailing public stock markets. The group had hoped to raise $4bn-$5bn for its latest Asian fund, but is stuck at about $1bn, according to investors.
Meanwhile, in most Asian markets public market valuations have declined 25 per cent in the past two years while in Shanghai, the stock market is at the levels of 10 years ago.
“Returns are trapped by history,” Mr Bonderman added. “When public markets returned 12 per cent and Treasury rates were 600 to 700 basis points higher, private equity returns of 20 per cent made sense.”
That message will not go down well with investors who expect strong double-digit returns in return for giving the big investment groups their money for 10 years.
In addition, investors, which include public pension funds, sovereign wealth funds and wealthy families allow the buyout groups to take 20 per cent of the upside as well as generous management fees that pay for the opulent lifestyles of founders such as Mr Bonderman.
Mr Bonderman is now planning a 70th birthday party in Las Vegas, following one 10 years ago in which the Rolling Stones entertained his guests.
While private equity groups promise their investors absolute returns, they depend on robust stock markets as the easiest way to cash out when they want to sell their companies.
When the IPO market shuts down, it becomes much harder to return money to investors, which then means it becomes harder for investors to write cheques for new funds.
However, easy money has provided a big boost to the private equity firms enabling them to refinance the debt of their over-levered companies.
In August, for example, KKR and TPG were able to refinance the debt of their troubled Texas utility, Energy Future Holdings even as TPG marked down the value of its equity to 10 cents on the dollar, according to its most recent letter to investors.