Let's talk about the biggest IPO of 2022 so far. The company going public today is TPG. Never heard of them?
TPG (Texas Pacific Group) is a private equity firm focused on leveraged buyouts and growth capital. Their investments span across public stocks, ESG, real estate, venture capital, public equity, and debt investments.
If this sounds familiar it is because we've covered companies like them before (via Blackstone).
And guess what happened to Blackstone over the last 12 months? They are up over 90% and are one of the best performing stocks of 2021.
So when TPG announced it was going to public, we decided to take a look underneath the hood to see if the stock warranted our stamp of approval.
What we saw was that it did but there are some risks you need to be aware of. Let's jump into the details.
Why TPG Is Different:
Before we discuss what we like about TPG we just want to quickly note why TPG is such a unique investment. It is because they give you "access" to the private markets.
Did you ever wish that you could invest in early stage companies like the next Uber or Airbnb before they go public? Or wish that you could invest in real estate or other assets that you "don't have access to"? Well TPG "allows" you to!
This is because TPG & companies like them traditionally only invests in these types of asset classes. And by investing in TPG, you're subsequently gaining diversified access to these types of investments. Whereas with other financial stocks you're gaining exposure to their investments, banking, debt, etc. -- stocks like TPG offer you a unique, cheap, easy and liquid way to invest in these types of asset classes short of owning the asset itself.
What We Like About TPG:
So now that you realize why TPG is such a unique investment let's get into what we like about them based on their IPO filing with the SEC.
Here's some of the best things we saw and what it means:
- AUM (assets under management) grew 81% over the last 5 years. In addition to this, their funds averaged an IRR (net of fee's) of 21%. Seeing these two things signals two things to us:
- The first is that their strategies scale in size. What this means is that strategies don't always work when you pour more money into them. For example, say they were investing in trailer parks across the US, at some point there's not going to be enough trailer parks that are good investments left. And if they have too much capital, they may not be able to buy and fix all the parks that they want. So they have two choices. Either A) Don't deploy all of the money -- thereby hurting their performance. Or B) They end up making bad decisions in order to use the capital that they have.
- Either way it's an issue the largest asset managers in the world run into and the fact that performance is still that good even with AUM almost doubling signals that their strategies scale. We ultimately interpret this is a good sign that revenue and performance won't be capped at some point in the foreseeable future.
- The second is that performance is how they make most of their money. And if performance continues to do so well, they stand in a very good chance to continue not only growing AUM but also growing revenue. Most recently performance revenues (revenues associated with their funds doing well) accounted for 82% of their total revenues. So the takeaway here is pretty straight forward, if their strategies can scale, then so can performance and ultimately so can revenue growth!
- The first is that their strategies scale in size. What this means is that strategies don't always work when you pour more money into them. For example, say they were investing in trailer parks across the US, at some point there's not going to be enough trailer parks that are good investments left. And if they have too much capital, they may not be able to buy and fix all the parks that they want. So they have two choices. Either A) Don't deploy all of the money -- thereby hurting their performance. Or B) They end up making bad decisions in order to use the capital that they have.
- The next best thing we saw is that their business became much more efficient. What we mean by this is that while their revenues grew significantly year over year, their expenses actually decreased -- the largest being from general and administrative. While it is hard to say if this is sustainable, even seeing the ability for their organization to grow while taking on less costs is encouraging.
- The last thing we noted was that their funds vision aligns with our own internal strategic visions. This is due to two main reasons:
- The first is that the largest % of their AUM is tied up in their capital growth program. This part of their business is suited towards traditional private equity moves like takeovers & buyouts (something that we're projecting to be a big theme in 2022). Additionally this part of their portfolio is expected to grow by 11% annually for the next 5 years. This is because the global market for buyout activity, SPACs & PIPEs have become extremely popular as of late and we are expecting more of these deals to come down the pike -- directly benefitting the largest portion of their assets.
- The second is the next largest % of their AUM (tied up in the growth fund) is investing in content creation, drug development and cybersecurity -- which are three themes that we also believe will do well over the next decade. Wrapped into this as well, is their impact program which is their ESG platform. This is one of the largest ESG platforms in the world. We believe ESG investing, and these themes will do extremely well and we're excited to see that TPG has properly positioned their portfolio to take advantage of these trends.
What We Don't Like About TPG:
While there are a ton of things to like about their business there are few risks you need to be aware of. They are:
- While their performance has been stellar, this also is a massive risk factor because if performance dips so will revenue and this type of revenue accounts for over 60% of their total revenue. While revenue due to performance has increased 30% last year & 70% the year before while management fee’s have stayed consistent, any break in this trend could spell doom for the company. While we don't believe this will happen, it is a major inherent risk.
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The other major notable risk to be aware of is that 40% of the stock being sold during the IPO is being sold directly from insiders. This can be interpreted as is the opportunity for these insiders to cash out their equity in the firm. While senior members can’t sell their stock for 180 days (which is a strong lock up period) this still is never a good sign for a companies outlook from the people who should have the most incentive to keep their chips on the table.
How We're Playing It:
While these are definitely major risk factors we think the upside for TPG, especially given how strong the brand is, is worth the potential returns over the next few years.
Therefore we're initiating a position now and believe this could be one of the best performing IPO's of 2022 (especially one that isn't as high profile as some of the upcoming surely will be).
However like all IPO's you need to be aware of volatility surrounding the day they go public -- especially in today's environment where 70% of IPO's in 2021 declined from their initial price.
What we're doing therefore is buying half now and then waiting to see if it dips before entering in our second allotment.
We'll be keeping you all updated as the day plays out in Discord! Please message us questions there.
Price Target: $43
Proposed Price at IPO: ~$31
Target Date: End of 2022
% Upside To Price Target: 38%
Rating: Overweight
Risk/Reward: High / High
Market Cap: Proposed valuation would be $9.5B
Dividend Yield: They’re planning on paying out a quarterly dividend (TBD on %)