TPG Inc. Q3 FY2023 Earnings Call

Good morning and welcome to TPG's Third Quarter 2023 Earnings Conference Call. Currently, all callers have been placed in a listen-only mode and following the management's prepared remarks, the call will be opened up for your questions. Please be advised that today's call is being recorded. Please go to TPG's IR website to obtain the earnings materials. I will now turn the call over to Gary Stein, Head of Investor Relations at TPG. Thank you. You may begin.

Great. Thanks, Angela and welcome everyone. Joining me this morning are Jon Winkelried, Chief Executive Officer; and Jack Weingart, Chief Financial Officer. I'd like to remind you this call may include forward-looking statements that do not guarantee future events or performance. Please refer to TPG's earnings release and SEC filings for factors that could cause actual results to differ materially from these statements. TPG undertakes no obligation to revise or update any forward-looking statements except as required by law. Within our discussion and earnings release, we'll be discussing certain non-GAAP measures on this call that we believe are relevant in assessing the financial performance of the business. These non-GAAP measures are reconciled to the nearest GAAP figures in TPG's earnings release, which is available on our website. Please note that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any TPG fund. Looking briefly at our results for the third quarter, we reported GAAP net income attributable to TPG Inc. of $15 million and after-tax attributable earnings of $196 million or $0.56 per share of Class A common stock. We declared a dividend of $0.48 per share of Class A common stock which will be paid on December 1st to holders of record as of November 17th. With that, I'll turn the call over to Jon.

Thanks, Gary. Good morning everyone. I want to start by acknowledging the recent tragic events and continued loss of life in the Middle East. We strongly condemn the terrorist attacks against Israel and are deeply saddened by the ongoing humanitarian crisis in the region. We're focused on supporting our colleagues and their families and our thoughts are with all who have been impacted by these horrific events. Turning to earnings, it's been a busy and productive quarter at TPG. We remain highly focused on our core business and are excited about the progress we've made across investing, capital formation, and organic initiatives. At the same time, we've made substantial progress on integrating Angelo Gordon into our firm. In my comments today I'll begin with a brief update on the AG transaction and then share some highlights from across our business. We closed our acquisition of Angelo Gordon on November 1st. Now, as one firm, we've strengthened our position as a scaled global alternative asset manager with six investment platforms, totaling $212 billion of AUM as of September 30. This strategic transaction marks an important and exciting milestone in TPG's evolution, providing us with several complementary business lines as well as additional levers to accelerate growth. We believe the addition of Angelo Gordon, together with our differentiated deal flow and strong investment track record, puts us in an advantaged position to capitalize on a number of long-term secular trends shaping the alternatives industry today including; one, a desire among the largest institutional LPs to allocate more capital to a shortness of scaled GPs who can partner with them across multiple asset classes. Two, in the important private wealth channel of growing demand for alternatives, especially in semi-liquid structures and yield-oriented asset classes like credit and real estate. And three, in the insurance sector, a strong interest in partnering with alternative managers that offer differentiated credit capabilities. Additionally, our new credit capabilities expand the set of solutions we're able to offer the companies we invest in which furthers our ability to structure unique and creative partnerships. This is particularly valuable given our history of leveraging our sector themes and geographic depth across business units and strategies. Although the transaction closed a few days ago, we're already beginning to see the benefits of our strategic combination. For example, in capital formation, we've made key introductions among our highly complementary client bases with only 10% overlap, across approximately 900 combined institutional LPs. A number of these clients are in active dialogue with us to broaden and deepen their commitments, given our expanded set of strategies across the risk-return spectrum. Additionally, our dialogue with insurance clients has fundamentally shifted. We are now able to have more targeted and deliberate discussions, given our multi-strategy credit capabilities. As discussed, we believe there is significant growth potential for us in the insurance space. On the deal front, we're seeing the positive impact of combining our intellectual capital and distinctive sourcing engines. Our investment teams are already engaging with each other, collaborating on shared ideas and identifying opportunities to potentially pursue sizable transactions together. We have also been working in a very rigorous and systematic way to identify and prioritize joint growth opportunities. This entails launching new products that leverage the expertise and intellectual property of our combined platforms. We're evaluating compelling opportunities in areas that are natural extensions of our business. And we look forward to sharing more details with you over time. Next Wednesday, November 15th, we'll be hosting a key-generate with TPG sell-side analysts to dive into AG's business in detail. In connection with this, we will publicly share a comprehensive set of materials on our website. We look forward to introducing TPG AG's deep bench of talent and differentiated investment style, portfolio construction and growth drivers across its strategies. Now I'll spend some time discussing how we've been driving growth and executing on our core business over the past quarter. We continue to make progress on our fundraises with $3.4 billion of capital raised in the third quarter, including successful closes in TPG Capital IX, Healthcare Partners II and Asia VIII. Each of our flagship campaigns remains on track to surpass the commitments of its predecessor. And we continue to have high-quality dialogue with clients, as we work towards final closings. In addition to fundraising, our investment teams have been busy across a number of dimensions, including pursuing attractive exits, driving performance in our portfolios and deploying our significant dry powder into new opportunities. While we continue to see strong top-line growth and stable margins across our portfolio companies, value creation for the quarter was relatively flat, as solid performance was largely offset by multiple compression, Jack will provide more details on both capital formation and value creation in his remarks. In terms of realization activity I'd like to highlight two notable liquidity events. During the quarter, we closed the sale of Creative Artists Agency or CAA, one of the world's leading entertainment and sports agencies to Artemis, The Investment Company by François Pinault. We first invested in CAA 13 years ago. And over the course of our ownership, EBITDA grew more than seven-fold. In 2021, we sold CAA from our communal fund into a single asset continuation vehicle, which enabled us to return capital to TPG Capital six investors, while continuing to partner with the company through its next leg of growth. We believe it was one of the largest vehicles of its type to be raised at the time and our recent exit, which generated over two times our money in two years is one of the most successful examples of a continuation vehicle monetization to date. In aggregate, both TPG Capital six investment and the continuation vehicle, CAA generated $2.4 billion of gains. It is a cornerstone transaction and our long and successful track record investing behind the secular tailwinds of media and content creation. We've built a unique ecosystem in the space and we believe there will be many opportunities to leverage our capabilities going forward. In our Asia business during the third quarter, we successfully completed the IPO of RR Campos, a manufacturer and seller of branded electrical wires and cables in India. The IPO was very strongly received with high-quality interest from both domestic and international long-only investors. The stock has performed well and is currently trading up 36% from the IPO price. We partially monetized our stake at attractive valuations highlighting the continued strength of TPG's franchise in India. Turning to deployment. Our sector specialization and long-term thematic investment approach have continued to generate differentiated opportunities for us. In particular, our deep industry expertise and proven ability to accelerate portfolio company growth have positioned TPG as a partner of choice for many corporates. This has led to bespoke and often proprietary carve-outs, as well as other structured partnerships over many years. Despite our general caution around the broader market today, we continue to find these compelling opportunities in spaces we know well. And these are investments we would pursue at any point in the cycle. In the third quarter, we deployed $5.5 billion of capital across our platforms, a significant increase over the activity levels in the first two quarters of this year and our pipelines remain robust. In TPG Capital, we closed the acquisition of Nextech, a leading provider of electronic medical records, practice management, payments and related solutions for specialty healthcare providers. Nextech follows our thematic focus on healthcare provider efficiency tools and patient payments, which is reinforced by our successful investment in WellSky. The deal team was comprised by investors from both our healthcare and software and enterprise technology teams, which reflects the collaborative culture we've built. In TPG Capital Asia, we received shareholder approval last week to take InvoCare Private in Australia. TPG has spent many years tracking InvoCare, we only add scale vertically integrated provider of funeral services in the region. We strategically acquired an initial public stake in the company earlier this year as a key step towards the eventual take private of the company. Our Impact Platform, which invests under the Rise brand continues to be a significant differentiator for TPG and positions us well as we move into the next decade of investing. Our Rise and Rise climate funds have been built to address changing societal needs while providing non-concessionary and competitive financial returns. As a testament to the franchise our team has built, the Rise platform was proud to be recognized recently on Fortune's Change the World list for the second consecutive year. This annual list acknowledges companies that have had a positive societal impact through activities that are part of their core business strategy. TPG continues to be the only global multi-strategy alternative asset manager to earn this distinction since the list's inception. We have maintained a steady investment pace in our impact platform. I'll discuss some recent examples. Rise and Rise climate agreed to invest in Tata Technologies, one of India's largest automated and aerospace-focused engineering R&D service providers, aiming to decarbonize transportation. This investment represents our second partnership with the Tata family, the first being with Tata Motors’ passenger electric vehicle business. Given the strong relationship we've developed with Tata, we were able to structure this opportunity on a proprietary basis, ahead of a potential public offering. Our Rise funds also agreed to acquire a majority stake in A-Gas, a global leader in the supply and lifecycle management of refrigerant gases with first-class recovery reclamation and repurposing processes. This built on Rise's thematic focus on supporting the circular economy and advancing the adoption of clean molecules to meet global decarbonization targets. Another particularly compelling area of investment opportunity for us today is real estate, where global markets have entered into a highly unusual period. Certain parts of the market are experiencing significant disruption, driven by rapid step-function changes in interest rates and valuations, as well as fundamental underlying changes to sectors such as office and retail. From our perspective, this is creating distinctive opportunities to acquire assets that would not typically be available for sale. We believe our real estate platform is particularly well-suited for this environment, as we raised nearly $7 billion for our current flagship opportunistic fund TREP over a year ago. We intentionally moderated our investment pace in anticipation of more attractive opportunities and we are beginning to see them now. During the quarter, TREP completed the $1.5 billion transaction in partnership with Digital Realty Trust to capitalize a portfolio of high-quality data centers in Northern Virginia with more than one million square feet in total. We also recently announced a $1.5 billion tender offer to take Intervest Private, a leading Benelux-based logistics REIT. The team has spent a number of years building conviction around the compelling market fundamentals of industrial real estate in the region and developing a relationship with the company’s management team, with stock trading down approximately 50% of its peak value. We leveraged our knowledge and expertise to approach Intervest about a take-private, resulting in this sizable transaction. In addition to our existing opportunistic equity funds, we have launched our new real estate credit strategy, TRECO. The combination of downward pressure on real estate values, reduced lending appetite, and elevated borrowing costs has created what we believe to be one of the most interesting investing environments we have seen in at least two decades. We believe we are positioned to take advantage of this, given the broad reach of our global real estate and credit investment platform. Together with TPG AG Real Estate, we now have a combined real estate platform totaling $36 billion of AUM as of September 30 and we're well positioned to play offense for several reasons. We have combined dry powder of $15 billion. We invest in defensive sectors where we have long-standing expertise and the ability to collaborate with other TPG platforms in areas such as content production and life sciences. With TPG AG, we have expanded our geographic footprint to include Asia. From our perspective, these markets are fragmented and particularly hard to enter from a standing start. We believe the two-decade-long focus of Angelo Gordon in markets like Tokyo and Seoul is incredibly valuable and advantageous. We have added a net lease capability, which provides attractive growth opportunities to a hybrid for the financing and real estate markets. Before I wrap up, I also want to spend a few minutes on our credit business. As we'll discuss in more detail next week, we're entering the credit space with a diversified, multi-strategy and scaled platform that's well equipped to capitalize on the significant tailwinds in this asset class. TPG AG's activity and performance over the last several quarters have reinforced our thesis in several ways. Let me share a few examples. Asset-backed lending and specialty finance strategies have become an increasingly important part of the private credit ecosystem. Current market volatility, especially as it relates to concerns around corporate earnings has accelerated demand for products that lend against cash-generating stable assets. Additionally, the regional banking crisis earlier this year has further enhanced interest in the space. In 2021, TPG Angelo Gordon identified a significant opportunity and raised over $1 billion for our first-time asset-backed lending fund. Since activation, the team has already deployed over half of the fund's capital into more than 20 transactions. We expect to substantially scale this strategy over time. TPG AG Credit Solutions, our corporate credit strategy is also taking advantage of the current market dislocation with its flexible mandate and the ability to pivot between public and private markets. The platform invested more than $750 million in the third quarter alone and our proprietary essential housing business originated financing projects with more than $2 billion of associated land and site development costs year-to-date. Finally, Twin Brook, our middle-market direct lending platform has demonstrated its resilience, as a result of its sector-driven strategy, focused on high-quality companies with strong covenant protections. Despite increased volatility, Twin Brook has no realized credit losses year-to-date and through the third quarter has deployed approximately $2 million of capital into more than 20 new companies and over 150 add-on investments to existing borrowers. I'll close out my remarks by highlighting some important firm events. A few weeks ago, we held our annual TPG Capital Investor Conference. We had 200 of our limited partners in attendance, together with nearly every professional on the TPG Capital team. We were able to highlight our strong momentum, including the differentiated investments we've recently made in TPG Capital 9 and Healthcare Partners 2 that exemplify our distinct playbook and flywheel. Although this event is focused on TPG Capital, we have always had the leadership from all of our business units end. And this year we also included our Angelo Gordon colleagues. We took the opportunity to showcase our talent, team and further connections between our LPs and the leaders across our firm. Now I'll turn it over to Jack to review our financial results.

Thanks, Jon. As a reminder, the results I'll be discussing reflect TPG on a standalone basis. They do not include Angelo Gordon, since the transaction closed subsequent to the end of the third quarter. TPG had a record quarter for fee-related revenues, with FRR of $321 million, up 12% sequentially and 14% year-over-year. This was a result of strong growth in both management fees and transaction fees. Management fees totaled $279 million and grew 9% from the second quarter due to improved fundraising combined with an increase in catch-up fees. Transaction fees increased 83% sequentially to $31 million and continue to be driven primarily by our lead role in structuring and placing the debt financing in connection with new investments across our platforms. Our well-established debt capital markets business continues to be a strategic weapon providing us and our portfolio companies with differentiated access to capital, which is particularly valuable in the current credit market environment. FRE was $156 million for the third quarter, up 24% sequentially and 29% year-over-year. This significant growth was due to the FRR growth I just mentioned as well as continued strong expense management resulting in an FRE margin of 49% for the third quarter. This is more than a 560 basis point improvement from the year-ago quarter. Our FRE margin for the last 12 months was 44%, which reflects the consistent progress we've been making towards the 45% FRE margin target we had set for the end of this year. While our FRE margin in the fourth quarter will blend down with the acquisition of Angelo Gordon, we believe this provides us with a meaningful margin expansion opportunity as we look to realize significant operating leverage from the combination and scaling of our businesses. After-tax distributable earnings for the third quarter were $196 million or $0.56 per share of Class A common stock. This includes $43 million in net realized performance allocations which were primarily attributable to the successful CAA realization that Jon discussed. Additionally, similar to the previous two quarters, we incurred non-core expenses related to the acquisition of Angelo Gordon of $9 million for the third quarter, which is included in our realized investment income and other line item. Turning to our non-GAAP balance sheet. We had $647 million of cash and cash equivalents and $450 million of long-term debt at the end of the third quarter. In late September, we upsized our revolver from $700 million to $1.2 billion and extended the maturity of both the revolver and our term loan. As a result of the financial strength of our business, we were able to maintain the attractive pricing on our facilities and further enhance our liquidity position to provide ourselves with ample financial flexibility. When we went public early last year, we capitalized our balance sheet with excess cash in anticipation of a potential strategic acquisition. Last week, we closed the acquisition of AG and used this excess cash in addition to drawing down $470 million from our upsized revolver. Pro forma for the cash used at closing our non-GAAP cash and cash equivalents at September 30 would have been approximately $170 million. Our net accrued performance allocations at the end of the third quarter were $692 million compared to $760 million in the prior quarter. This decrease was driven by the realized gains I mentioned earlier as well as a $24 million decline in the value of our investments. Our aggregate portfolio depreciated less than 1% in the third quarter and appreciated 6% over the last 12 months. This performance reflects continued top-line growth and stable margins across our companies offset by multiple contraction. Specifically, our private equity portfolio grew revenues by 26% over the last 12 months and our companies generally continue to effectively navigate inflationary pressures by passing through higher input costs. Within real estate, higher cap rates were largely offset by our careful sector selection and favorable secular growth trends across our sub-sectors such as light industrials, student housing, data centers, purpose-built single-family rentals and life sciences, which collectively make up approximately 65% of our unrealized value. Across our portfolio, net operating income for the last 12 months grew 11% year-over-year. We finished the third quarter with $136 billion of assets under management, up 1% year-over-year. This was driven by $11 billion of capital raised and value creation of $3 billion, partially offset by $13 billion of realizations over the last 12 months. Fee-earning AUM was $79 million and AUM subject to fee-earning growth totaled $11 billion at the end of Q3, of which $9 billion was not yet earning fees. Moving to fundraising. We raised $3.4 billion during the quarter and continue to make progress across our flagship fundraises. As Jon mentioned, we continue to expect each fund to be larger than its predecessor. For TPG Capital IX and Healthcare Partners II, we expect to hold final closes towards the end of this year. For Asia VIII, we expect a final close in the first half of next year. And for Rise III, we held our final close for the fund over the weekend, bringing total fund size to $2.7 billion. This is a 24% increase from Rise II and demonstrates the strong support from both our new and existing LPs. As we complete these campaigns, we're experiencing nice momentum as we launch our next flagship campaigns. First, we recently launched fundraising for our sixth growth fund and are in the process of holding a strong first close. Second, we are now approximately 65% invested and committed for our $7 billion Rise Climate Fund and we're actively working towards launching the next vintage. Finally, as we launch those next-generation flagship funds, we're making solid progress across the new business initiatives I've discussed previously. For our inaugural real estate credit strategy, after quarter-end, we received commitments of more than $750 million. We have closed on approximately $650 million of this capital and we expect to close on the remainder as we raise additional capital for the TrackO fund. In our Climate business, in addition to launching the next flagship private equity fund, we're continuing to make progress on the launch of our inaugural climate transition infrastructure fund. We're seeing strong interest from anchor LPs and expect to be in the market in the first half of 2024. Overall, we remain very active across all of our strategies and we're confident in our ability to continue delivering differentiated performance. Our growth engine is strong and with the addition of TPG Angelo Gordon and our combined capital formation capabilities, we believe we're in an excellent position to drive consistent, meaningful, and diversified growth across our business. Now, I'll turn the call over to Angela to take your questions.

Our first question comes from Alex Blostein with Goldman Sachs. Please go ahead.

Hi, good morning everybody. Thank you for the question. I was hoping we could start with a quick discussion on Angelo Gordon and I understand, we're going to spend more time on it next week. So maybe this is a little bit of a preview. But as you look at some of the information you put out on the business, a couple of weeks ago, it looks like fundraising Angelo Gordon was fair to muted. I think it was only about $2 billion through the first half of 2023. So, help us maybe unpack, what were some of the sources of constraints in that business? Was that sort of deal related and uncertainty related? And how do you expect the fundraising to evolve from here, action of any sort of synergies with TPG? Thanks.

Yes, I can address that. If you look at the fundraising momentum that Angelo Gordon had before our transaction, they had made significant progress in various parts of their business. When we announced our transaction, there was a pause from limited partners who wanted to understand what was happening. This included questions about how Angelo Gordon would be integrated into our firm, any potential changes in decision-making regarding investments, and whether there would be personnel changes. It was not surprising that many limited partners took a step back to grasp the scope of our approach, and they wanted to engage with us directly. We have spent considerable time meeting with them, even before closing the transaction, to familiarize them with TPG and our plans for integration. Some of us attended their annual LPAC meeting, where we held a fireside chat and had one-on-one meetings to address questions. This engagement will continue, and the feedback from their limited partners has been positive. We have made it clear how Angelo Gordon will fit into our larger organization, and as we move forward post-transaction, things are returning to a more business-as-usual state. Given the transformational nature of this endeavor for both organizations, we understand their desire for more information, but we are confident that we will be able to accelerate capital formation together.

Yes. I would only add to that, Jon, that in addition to the temporary pause from their existing LPs as they wrap their minds around this and make sure they're comfortable with the combination, the real longer-term opportunity here is expanding their LP base and introducing them to some of our larger LPs. And that's something that we've already been actively working on that takes a while to play out, but we're encouraged by the early engagement with some of our larger LPs to help expand their capital. So we would expect a reacceleration of their fundraising as we enter next year.

Great, that's helpful. Thanks. For my second question about TPG's fundraising, it's encouraging to see you make progress with the current campaigns and nearing completion. As you mentioned, you are set to launch Climate 2 next year. Considering the challenging environment for private market fundraising this year, how do you think LPs will respond to this strategy, especially since it is more nuanced and tailored to your approach? Additionally, how do you see their ability to increase the fund size compared to previous strategies?

Yes. Looking at the overall fundraising market, since we went public early last year, we anticipated a significant cycle with our flagship funds over the next few years. We're nearing the end of that cycle now. The work we've been doing has prepared us for the upcoming wave of growth as we move into next year and the year after. We are pleased with the progress we've made in creating new business opportunities, such as the Climate Infrastructure Fund and the Treco fund, as well as our acquisition of Angelo Gordon. A new growth trajectory is ahead of us. Regarding the Climate private equity fund, I see it as the next phase of our $7 billion fund, complemented by the Climate Infrastructure Fund. We will keep you updated as we make progress. Early engagement has been very strong, and we believe we maintain a leading position in the market. Over these two funds, I anticipate significant growth compared to the initial private equity fund. Considering all the factors I mentioned, including Angelo Gordon's funds, the growth in credit, and the climate launch, we expect fundraising activity to increase next year compared to this year.

Thanks. Good morning everyone. We wanted to focus on the growth capital business.

Good morning, Craig.

Good morning, Jack. So TPG has almost $9 billion of unrealized value across growth. So we're curious how are those portfolio companies performing against the higher rate backdrop? And if you have any fresh data points like revenue or EBITDA trends to date that would be helpful too.

Sure. I mean, I talked about the overall portfolio performance across our private equity portfolios in my comments, Craig, in growth the same dynamics apply still strong revenue growth, kind of probably mid-teens in the growth portfolio strong EBITDA growth. So we're actually seeing margin expansion in the growth portfolio. So the portfolio health is quite good. The broader growth equity market is very interesting and we continue to feel like we're very well positioned there. It was obviously the market that saw the biggest spike in activity towards the end of 2021 and kind of the most active part of the market. As you know from looking at our results, we were relatively patient in that environment. Now, with the IPO market becoming more difficult, some of those companies needing to raise follow-on capital with our position as kind of a solution provider adding more than just capital. We're pretty well positioned to capitalize on that disruption in the market. And you see that in both our growth and TTAD funds. I mentioned that we accelerated the first close process and growth because we're seeing a pickup in investment activity. So that happened after the end of the third quarter. So we'll be talking about it in the fourth quarter earnings call, our progress in starting to raise the next growth fund. But the reason we're accelerating it is because of the new investment activity we're seeing. And likewise in TTAD, we're now over half deployed in the relatively new TTAD fund.

Hi. Good morning. Thanks for taking the question. TPG generated meaningful carry and the continuation on the United Artists this quarter. And Jon, you mentioned that you see opportunities to leverage continuation funds as we look forward. So maybe first, are there more opportunities like United Artists in your portfolios? And is that something we can expect if the PE environment actually remains challenging? And then second, last quarter I think you mentioned TPG back continuation vehicles in India, Germany and the US. So are there different ways for TPG to participate in continuation funds, either by asset class or regions as we look forward?

Let me take a shot at it. First of all, the continuation vehicle market and its evolution within private equity is increasingly becoming an important tool for firms like TPG and others. Clearly, exit activity and volume are lower, and we expect this trend to continue. Given the current volatility in market valuations and the overall dynamics of the exit environment, we anticipate continued lower activity. In this context, there is significant pressure within our industry to find ways to return capital to LPs. LPs are constrained by several factors, particularly the slowdown in exit activity. The continuation vehicle market has become better understood and more accepted over time. In the past, LPs were hesitant to grasp the implications of continuation vehicles and their effect on capital retrieval and asset movement between funds. However, it is now a well-recognized part of the market. With that understanding, we will strategically consider using continuation vehicles for our portfolio where appropriate. While I expect this to be more of an exception than the rule regarding exit activity, there is certainly a role for it in the market. CAA is a prime example where our long-term partnership with the management team and our outlook on the company’s growth, combined with the need to return some capital from a fund that had timed out, illustrates why we might utilize a continuation vehicle. Thus, we plan to continue leveraging these vehicles, and the success of the CAA vehicle enhances our credibility with capital sources in that aspect of the market. On the other hand, the reason we are now fundraising for TGS, our GP solution strategy, is due to an increasing number of sponsors seeking to partner with capital sources that understand company valuations and can provide reliable evaluations in the CD process that LPs can trust. Additionally, some sponsors approach TPG for GP solutions because they recognize our deep sector expertise across various industries. We believe we are strategically positioned to be a preferred partner in that market. You highlighted several of our deals, but we have not seen any decline in deal flow in this market. Therefore, we are confident that this is a strategy we can scale over time. In the private equity markets we operate in, very few markets are undercapitalized, and this is one of them in terms of the capabilities of active firms. We expect this to remain a strong opportunity for raising capital.

Hey. Good morning. I wanted to ask on the real estate credit strategy checkout. I was just hoping you can update us on the build-out of the platform there where you're seeing some of the most compelling opportunities to put capital to work now in the real estate credit marketplace the types investments? And then, how are you thinking of building out this platform as you look out over the next three to five years, just in terms of how you're thinking about enhancing your origination capacity? Thank you.

Mike, thanks for your question. First, we're looking to capitalize on our origination capabilities that stem from our public REIT. We have already established a solid presence in the market regarding real estate credit opportunities. Our approach is quite broad regarding the types of opportunities we will pursue, and we plan to expand our origination capabilities over time. We are well-connected to various sources of flow, especially banks that are under pressure and may need to offload assets. This presents a clear opportunity for us in the current market. There are also numerous financing solutions available for real estate players right now, and it’s a disruptive environment. Given our strong relationships throughout the real estate market, due in part to our operations with trip and Angelo Gordon in different sectors, we have built significant credibility as a financing provider that truly understands the market. We view this as a scalable opportunity for real estate financing over time, especially since the current market is quite unsettled. With our expertise, we believe we can offer valuable solutions and navigate the risks that the market presents. Furthermore, there's considerable dislocation in public markets and publicly traded securities within the real estate sector. We anticipate being able to transition between public and private markets thanks to our capital pool. The team at Angelo Gordon, particularly in structured credit, is also identifying similar opportunities. More updates will come, but we believe we can grow the business in alignment with the opportunities we see in terms of resources and market presence, and we are excited about the prospects ahead.

Great. So as you know Jon, the addition of Angelo Gordon certainly gives you much broader diversification and capabilities to better service the insurance industry and we'll truly hear more about this next week. But I just wanted to maybe hear a little bit about how you're approaching that channel, thinking about that playbook and maybe how long it would take you to meaningfully tap into the opportunity there? And what's the incremental investment that may be needed just to get you to where you want to be over time?

Yes, it's a good question. As I mentioned in my prepared remarks, the nature of our discussions has significantly changed. To provide some context, before the Angelo Gordon transaction, we communicated with several insurance companies that were our limited partners, but we were primarily limited to serving them in terms of private equity and real estate. We also had inquiries from life and annuity insurers regarding a more comprehensive relationship, specifically wanting to understand our overall plans for credit as an asset class. These conversations were challenging to move forward. Since the Angelo Gordon transaction, there has been a notable improvement in both the quality and type of discussions we are having with various industry players. These discussions can be categorized into two groups: general limited partner relationships and participation in credit strategies like separately managed accounts or permanent funds, and more strategic relationships akin to those seen among other alternative asset managers in the market. We currently have several ongoing conversations in that strategic category. It's difficult to predict how long it will take to make tangible progress, but it's a top priority for us as a combined firm now. We have formed a dedicated team from TPG and AG to focus on this. Over time, we will likely attract talent in the area of effective asset management for life and annuity players, known for insurance solutions expertise. We're excited about this opportunity, now that we are one firm, as we believe we can play a competitive role in this space. Additionally, Angelo Gordon’s multi-strategy credit platform was particularly appealing because it offers a diverse range of credit solutions, including corporate credit, structured credit, asset-backed securities, and direct lending through Twin Brook. This broad capability is essential to meet the needs of the insurance industry. We are very focused on this opportunity and believe we are well-positioned to succeed. We will keep everyone updated as we continue along this path.

Great. Thanks. Good morning, everyone. Good almost afternoon.

Good afternoon.

Most of my questions have been asked and answered. Do you have any insights on the LP conference, specifically regarding Rise climate and climate infrastructure? I'm curious about what you're hearing from the LPs regarding the demand for these two asset classes individually. Clearly, there's strong demand for energy transition, but how do they view infrastructure? Additionally, if they have limited capacity to invest, what are they choosing to replace—either infrastructure or energy transition?

I believe that the climate private equity strategy and transitional infrastructure represent a unique frontier in our markets. Over the past five years, we have dedicated significant resources to this sector, building our capabilities, and we find ourselves among a small group of credible firms in this space. This has been a strategic effort on our part because we recognize that solving climate-related issues will require an enormous amount of capital over the next decade and beyond. The number of credible solution providers currently available is quite limited, and we see ourselves as distinct in terms of what we have developed and our expertise. From what we observe, limited partners are approaching this area in various ways. Some are viewing it as part of their private equity strategy, while others are tapping into an innovation capital pool before eventually incorporating it into their private equity allocations. This area is too significant for large pools of capital to overlook, leading to strong engagement, as mentioned by Jack. We anticipate raising more capital in climate investment and infrastructure than we did previously, based on our interactions with limited partners, which indicate a strong level of engagement. On the infrastructure side, as Jack mentioned, we see a close connection between climate technologies and capital requirements, which are evolving rapidly. The historical trends we've seen in other sectors, like real estate, are evident here as well. Initial opportunistic investments are transitioning to lower-cost capital opportunities like core and core-plus. We are observing significant capital movement into infrastructure due to the substantial funding needed for various industry developments. The synergy between private equity and infrastructure capital offers us flexibility and enables us to create tailored solutions for companies and partners in a way that is truly unique thanks to our extensive knowledge across the sector. I anticipate that investment in this sector will continue to grow significantly.

Yes, Brian. I would only add just to amplify Jon's comments that the breadth of LPs interested in this area has expanded significantly. If you think about the last – the first Rise Climate fund we raised was two or three years ago. And certainly since the first Rise fund we raised six, seven years ago, the awareness among our LP base of the investment opportunity, the capital needed in these areas has expanded significantly. So while it may be the case that any one LP is more capital constrained today than they were two or three years ago, I think as we embark upon this next wave of fundraising across climate generally, the number of LPs around the world who have identified this as an important investment area for them has increased significantly.

The next question comes from Adam Beatty with UBS. Please go ahead.

Thank you and good afternoon. I appreciate your staying on making time for us. I want to follow up on real estate. Thanks, Jack. On real estate maybe a little bit more on the equity side. I was intriguing what Jon said before about potential sort of multi-decade opportunity. So right now TPG is positioned in some of the more resilient real estate subsectors, certain areas of housing, light industrial life sciences. Just wondering whether you're thinking about deepening the involvement and investment in those areas or maybe seeing opportunities in some of the less favored real estate sectors like office or retail? And then, if you could maybe just a quick thumbnail, what Angelo Gordon brings in the areas of value-add and Triple Net. Thanks very much.

I believe we are very sector focused, which has been a fundamental part of our strategy. This attention has guided our capital investment decisions. Regarding your question about exploring less favored sectors, our investment approach on the equity side has involved assessing different sectors over time. If we determine that an opportunity in a sector isn't viable yet due to valuation or fundamentals, we wait for a better moment. For example, we've avoided the hospitality sector until after COVID, when we found suitable investment opportunities. As for office and retail currently, we see the market as unstable, and we don’t foresee appealing opportunities there in the near term. Our office exposure is about 2% of our portfolio, so it’s not a focus for us right now. More interestingly, we're noticing a need for liquidity among certain investors, which is creating significant opportunities in core sectors we understand well. For instance, we're currently engaged in a take-private deal in Europe that comprises roughly 80% industrial and 20% office, as they're offloading office assets. We're targeting an industrial corridor connecting major transport routes into Germany that we've monitored for some time. This has provided us with an entry point we find attractive. We’re also pursuing another industrial deal in North America that aligns closely with our core interests. These situations present favorable risk-reward profiles in the current pricing environment. On the Angelo Gordon side, they have helped expand our geographical reach, particularly in Asia where entering the market has historically been challenging. Their established presence there offers us a strong opportunity for growth, enhancing our overall footprint in private equity and real estate. On the net lease side, I think net lease is a business that we actually looked at prior to the Angelo Gordon acquisition. And in this environment, given what's gone on with the regional banks and the lack of financing availability, net leasing in a lot of respects is a financing product for corporates that are looking to use assets in order to get cost-effective financing. So, we think this is actually a pretty good environment to try to build on what is the core of our net lease strategy in AG. So you'll hear more from us about it, but that's our perspective.

Yes. Thanks for taking my question guys, and appreciate as more detail next week but my question is on Gordon's FRE margin, which was 23% in H1. Just wondering how quickly you think that can scale up. I think you mentioned previously the mid to high-20s on longer time is running more than the FRE margin of Angelo Gordon shouldn't be in the 40s like a TPG stand-alone? Thank you.

Yes, that's a great question. We will discuss this in more detail next week. One key aspect we appreciate about the Angelo Gordon platform is its breadth, which is essential for areas like the insurance market. Additionally, the multi-strategy coverage across almost all facets of private credit was crucial for us when considering the right platform for growth. However, supporting all these services is costly, as it requires building an operational platform for each business, and they have fully developed scalable operational infrastructures for themselves. As we merge into a combined firm, we are identifying synergies and finding ways to operate more efficiently together to scale their businesses. We fully anticipate that we will achieve their margin. Our primary focus at this moment is on our combined margin. We are beginning to see the same margin expansion potential for our merged entity that TPG experienced on a stand-alone basis, and I believe your observations about their credit platform potentially reaching the 40s if it were a stand-alone company are absolutely accurate.

Great. Thanks, Angela. And thanks everyone for joining us today for taking on such a busy day, appreciate it. And if you have any follow-up questions please feel free to circle back to us. Otherwise, we'll look forward to speaking to you again next quarter. Thank you.

Thanks, everyone.

This concludes today's TPG Third Quarter 2023 Earnings Call and webcast. You may disconnect your line at this time, and have a wonderful day.