•Press Release Private Equity
Washington DC — In a letter to the Securities and Exchange Commission (SEC), CEPR’s Co-Director, Eileen Appelbaum, and Jeff Hooke, professor at Johns Hopkins University Carey Business School, raised concerns that the SEC isn’t getting a realistic picture from the private equity giant TPG as it moves closer to a US initial public offering.
“Investors in a public company need more disclosure than is provided by TPG’s documentation sent to the SEC. Investing in this company is riskier than it appears in the SEC filing,” said Appelbaum.
Here is the full text of that letter:
December 19, 2021
Renee Jones, Esq.
Director, Corporate Finance
Washington, D.C 20549
Re: TPG Inc. IPO Form S-1 dated 12/16/2021
Dear Ms. Jones:
The form S-1 should have extra disclosure to clarify the investment performance over the last 10 years of the “Capital” line of business. This line of business is sometimes referred to as “private equity-buyouts,” among the investment community.
On page 3 of the S-1, the net returns are indicated as 21% per year over the last 10 years. Investors should know in the summary table that much of the value generated in the last 10 years is unsold mark-to-market estimates, as set forth on page 185. The returns are not real cash. Investors should see this important data in the summary, not have to flip back to page 185.
The summary table on page 3 and on page 185 should include “net MoM” statistics, not just a “gross MoM” which is a misleading statistic absent of many fees. A gross MoM is like a baseball player excluding strikeouts from his batting average. A gross MoM excludes fees as the S-1 notes. The net MoM is far more relevant to investors and should be in the summary. Many investors do not read an entire S-1.
Also, “Net MoM” is difficult to manipulate, whereas the net IRR can be manipulated by the PE manager through the use of (i) credit lines; and (ii) selling good deals first. If the S-1 showed the net MoM, the investors would see that the average Net MoM for the Capital funds is about 20% lower than those gross stats on page 185.
There should also be some reconciliation with the TPG claim of (i) a 21% net IRR; and (ii) the likely “net MoM” statistic of 1.6x (based on PE data services, and CalPERS PE reports on TPG).
How can a 10-year TPG fund have a “cash in/ net cash out to investors” ratio of say 1.6x, and yet indicate a compound IRR of 21 %? A 21% IRR over a six year average life portfolio would show a ratio of 3.14x (1.21 to the sixth power), not 1.6x.
PE data services like Preqin and Pitchbook, use “net MoM,” so for the statistic to be excluded in an IPO prospectus for a PE fund seems illogical, even when the S-1 is being drafted by TPG’s paid accountants and lawyers.
The 10-year Capital net IRR net statistic (21%) should also be shown “with credit line” (which is the number shown in the S-1) and “without credit lines”. The “without” statistic is a better indication of TPG’s investment prowess, since it does not inflate the IRR.
Since TPG is attempting to indicate how great its performance is as a private equity asset manager in the S-1, the Capital business line “net IRR without credit lines” should be compared in the summary to an objective standard, like the S&P 500 or the Russell 2000.
The investment performance of the last three Capital buyout funds is heavily dependent on what TPG says the unsold portions of those funds are worth. This fact (on page 185) should be indicated in the summary, and it should not be buried in the risk factors section or page 185.
An additional risk factor should be the potential reversal of the “Net Asset Value Expedient” (NAVE) convention, which the FASB instituted a few years ago. This convention allows institutional investors to value illiquid LP interest in PE funds at 100% of supposed portfolio value, and thus reversed long-standing FASB policy regarding the valuation of illiquid investments, e.g., closed-end funds require an illiquidity haircut, often between 5% and 20%. Without the NAVE, the PE business might dry up, as institutions would take large write-downs on their illiquid LP interests.
There is also the matter of the $590 million settlement in 2014. Buyout funds, including TPG, were accused of fixing low prices on numerous public LBOs. The suit claimed billions of losses for public stockholders who sold to LBO funds, which thus translated into billions of extra profits for buyout funds. Assuming the accusations were true, the IRR of TPG buyout business was inflated artificially, and this might be a disclosure item.
PE accounting and performance measurement is complex. We are looking forward to seeing the SEC stop rubberstamping everything the PE industry puts in front of it.
Center for Economic and Policy Research
Johns Hopkins University
Carey Business School
CC: Weil, Gotshal & Manges (NYC), Deloitte & Touche (Fort Worth)