TPG Inc. Q2 FY2024 Earnings Call

Good morning and welcome to the TPG Second Quarter 2024 Earnings Conference Call. 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 now begin.

Thanks, operator and welcome everyone. Joining me this morning are Jon Winkelried, Chief Executive Officer, and Jack Weingart, Chief Financial Officer. In addition, our Executive Chairman and Co-Founder, Jim Coulter; and our President, Todd Sisitsky, are also here and will be available for the Q&A portion of this morning’s call. 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’re presenting GAAP and non-GAAP measures, and we believe certain non-GAAP measures that we discuss on this call 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 second quarter, we produced a GAAP net loss attributable to TPG, Inc. of $14 million and after-tax distributable earnings of $207 million or $0.49 per share of Class A common stock. We declared a dividend of $0.42 per share of Class A common stock, which will be paid on August 30, 2024, to holders of record as of August 16, 2024. I’ll now turn the call over to Jon.

Thanks, Gary. Good morning, everyone. Our strong second quarter results highlight the significant momentum across our business as we continue to successfully scale and diversify. We finished the quarter with $229 billion and $137 billion of fee-earning AUM across more than 30 strategies in private equity, credit, and real estate. Over the course of last year, we drove a step function change in our growth profile and earnings power as a result of both organic and inorganic activity. Our firm is capitalizing on our expanded breadth. In my comments today, I’ll focus on two areas in particular. First, the strong momentum in our capital raises across our diversified product base; and second, our active pace of deployment and the differentiated deal types we are sourcing across our platforms. In addition to these two topics before I hand the call over to Jack, I’ll also touch on the significant market volatility that’s been taking place over the last few trading days. Beginning with fund fundraising, we raised $6.3 billion in the second quarter. Importantly, over 70% of this capital or $4.5 billion was raised across our credit strategies. During the quarter, we held the final close for Twin Brooks’ fifth drawdown fund. In total, we raised $3.9 billion, which exceeded our original fund target and is 13% larger than its predecessor. This successful outcome was driven by Twin Brooks’ strong investment track record and differentiated focus on sponsor-backed lower middle market companies as investors seek to complement and diversify their exposure to the U.S. direct lending market. In addition to receiving strong support from existing clients, Twin Brook meaningfully expanded its investor base globally, particularly in Asia, and increased diversification towards sovereign wealth funds as well as multinational insurance companies in Europe and Japan. This campaign is a strong indicator of the power of our platform and the cross-selling opportunities in front of us. We are also raising capital through other vehicles to accommodate investors across the broader Twin Brook platform as we continue to out-originate our capital base. This includes the establishment of new SMAs and strategic partnerships, as well as our non-traded BDC, TCAP. TCAP continues to raise capital at a steady pace and ended the quarter with $2.5 billion of total AUM. Currently, TCAP is being distributed by two of the largest warehouses in the U.S., and we expect the third to be added by the end of this quarter. Turning briefly to our Credit Solutions platform. During the quarter, we raised approximately $2 billion, including $1.1 billion for the first closing of Credit Solutions 3. We also held additional closes for Essential Housing 3, bringing the total capital raised for the fund to $1.3 billion at the end of the second quarter. Looking to the rest of the year, we expect our robust fundraising momentum to continue, led by our Rise climate franchise. Last quarter, we stated that we expect our impact platform to achieve $35 billion of AUM within 2 years, and we believe that we’re tracking ahead of plan on that objective. In our Climate private equity strategy, we are seeing strong support from both existing and new clients. We are holding our first close for Rise Climate 2 this quarter and expect to announce a strong start to that campaign on our next call. We continue to target an aggregate of $10 billion across this fund and the Global South initiative and we expect the majority of the capital to be raised in 2024. Additionally, we expect to hold a close before year-end for our first RISE climate transition infrastructure fund. In May, we announced a $1.5 billion strategic partnership with Hassana Investment Company, a substantial portion of which will anchor our infrastructure fund, and we are in active dialogue with other LPs to provide additional anchor capital. Our leadership position in climate investing is a powerful differentiator that enables us to organically expand into adjacent asset classes with significant growth potential, such as infrastructure. As you can see, our fundraising momentum continues to ramp and is well diversified across our business. Similarly, our deployment pace remains robust. We invested $7.6 billion of capital in the second quarter and more than $35 billion over the last 12 months on a pro forma basis, including TPG AG. I’ll spend a moment on TPG Capital to illustrate the interesting ways we are deploying capital through our proprietary and distinctive sourcing approach. Over the last 12 months, TPG Capital has announced or completed 9 investments with an aggregate equity commitment of nearly $7 billion that resulted from long-standing C-level relationships within our core thematic areas. More than half of this capital was invested into deals that were either a complex corporate carve-out or create a partnership. TPG has a long and successful history of unlocking value and driving growth through these types of differentiated deals. I also want to highlight our activity in Europe, which is a high priority region for us. Our President, Todd Sisitsky, just returned after spending 6 weeks there working closely with our teams to further build on our strong investment momentum, client relationships, and franchise in the region. Over the last few months, we have announced or closed several interesting transactions in Europe and our pipeline remains strong. For example, in the second quarter, TPG Capital announced the €3.9 billion carve-out of Aareon, a leading provider of SaaS solutions for the European property industry from Aareal Bank in Germany. This investment represents an attractive opportunity to accelerate Aareon’s growth as a stand-alone company and in a resilient but fragmented market. Turning to TPG growth. In the quarter, we closed the proprietary acquisition of Untitled Entertainment, a leading Hollywood talent management firm. Untitled will be part of a newly formed platform that will leverage our deep experience investing in media and entertainment to acquire and build a diversified global business focused on talent management and representation. Our Rise and Rise Climate funds continue to deploy capital at a steady pace given our differentiated position as the partner of choice in the impact space. Since quarter-end, we have already signed or closed 4 additional transactions with an aggregate equity commitment of approximately $800 million. Rise recently led an investment of over $200 million into Food Smart, a leading U.S. telenutrition provider and food benefits management platform. Additionally, Rise Climate agreed to acquire Olympus Terminals, a large-scale renewable fuels logistics provider in California. Olympus plays a critical role in the decarbonization value chain and represents our focus on investing in companies enabling the energy transition. Turning to our real estate strategies, over the last few years, we have been anticipating substantial stress in the system to drive attractive investment opportunities, so we were purposely patient in our approach to capital deployment. Since mid-2023, we have seen a significant increase in investment activity, acquiring a number of distinctive high-quality assets from sellers in need of liquidity. With combined dry powder of $14 billion across our real estate businesses, we expect to lean into the growing number of interesting opportunities we are sourcing in our core areas of focus. We invested $1.2 billion in the quarter, and I’ll share some brief highlights. Within TPG Real Estate, during the quarter, we completed investments in 2 office-to-residential conversions in New York City. In aggregate, we acquired the properties at a significant discount to their prior basis, and we’re working with best-in-class partners to execute these conversions. TPG AG’s European real estate business has also been capitalizing on this environment, including investing in a mixed-use property in Berlin, several Swedish logistics assets, and a homebuilding platform in the U.K. Each transaction was off-market and bilaterally negotiated with highly motivated sellers. Our TPG AG real estate sourcing model, which leverages hundreds of operating partner relationships across local markets, continues to demonstrate its unique value proposition. Finally, within credit, we deployed $4.5 billion across our strategies in the second quarter. Twin Brook, our direct lending business, continued its strong investment pace in the quarter, bringing total gross originations in the first half of the year to a record $4.8 billion. This exceeds Twin Brook’s prior first half gross origination record by more than $1 billion. Twin Brook is a leader in lending to lower middle market private equity-backed companies, and 100% of Twin Brook’s loans are senior secured first lien with financial covenants. Twin Brook has generated attractive net returns of 11% since inception with an annualized loss rate of only 1 basis point. During the second quarter, our Credit Solutions platform deployed approximately $900 million of capital primarily through our proprietary essential housing business. Notably, essential housing, which provides land financing to leading homebuilders, has seen substantial origination volume. We closed on $1.8 billion of project value across 67 projects with 9 homebuilders during the first 2.5 months of the current fund's investment period. Within our Credit Solutions funds, given our flexible mandate, we continue to monetize our public positions and are currently evaluating the largest pipeline of private investment opportunities since the strategy was launched. We are actively working to partner with a range of public and private companies with various needs for bespoke private capital solutions. Finally, we continue to see growing client demand from specialty private credit, given the desire to diversify exposure away from corporate credit into more non-correlated risk. During the quarter, our structured credit platform deployed $1.9 billion across a diverse array of consumer, specialty, and mortgage finance transactions. Most notably, our asset-based credit fund completed its first investment in Australia demonstrating the global reach of this business. Overall, given the breadth of capabilities within our credit business, we are well positioned to continue to accelerate growth as evidenced by our fundraising momentum, deployment pace, and investment pipelines. Each of these strategies is currently out-originate its capital base. So, we see a significant opportunity to scale them through a combination of raising additional capital and driving further product innovation. Continuing with this theme, innovation is the cornerstone of our ability to grow the firm. Looking at a 5-year period from the beginning of 2021 to the end of 2025, we expect we will have raised approximately $40 billion during this timeframe across new strategies, pro forma for TPG AG. This includes growing our Rise Climate franchise and expanding into infrastructure, leveraging our real estate footprint across asset classes and geographies, including Japan, scaling our GP-led secondaries business, and broadening our credit platform. Our proven ability to innovate is even more powerful across our well-diversified platform, which provides many new avenues for organic growth. Before I turn the call over to Jack, I’d like to comment briefly on the current market backdrop. Based on the market correction we’ve all witnessed over the last few days, it seems likely we have entered a new period of increased volatility, marked by more imminent interest rate cuts and heightened geopolitical risks. Although the markets have clearly become far more volatile since late last week, it’s not yet clear how this may impact the underlying economy. We are fundamental investors and from our perspective, the fundamentals we look at every day remain reasonably strong. We have experienced many market cycles during our careers, and we know periods of market dislocation create compelling investment opportunities. We’ve been preparing for an environment like this and we are well positioned with $53 billion of long-dated capital available to invest across our private equity, credit, and real estate platforms. Now I’ll turn it over to Jack to review our financial results.

Thank you, Jon, and thanks to all of you for joining us today. We ended the second quarter with $229 billion of total assets under management, up 65% year-over-year. This was driven by $75 billion of acquired AUM from Angelo Gordon, $23 billion of capital raised, and $11 billion of value creation, partially offset by $17 billion of realizations over the last 12 months. Fee-earning AUM increased 74% year-over-year to $137 billion, and we ended the quarter with more than $53 billion of dry powder, representing 39% of fee-earning AUM. We also had AUM subject to fee-earning growth of $25 billion at the end of the quarter. This includes $16 billion of AUM not yet earning fees, which increased 17% sequentially and as a result of the strong fundraising progress we made across our credit businesses this quarter. Our fee-related revenue in the second quarter was $459 million, up 61% year-over-year, primarily driven by the acquisition of Angelo Gordon. In addition to the contribution from TPG AG on a stand-alone basis, TPG grew fee-related revenue 13% organically year-over-year. Our Q2 FRR included management fees of $413 million and continued strong transaction fees of $34 million. Following a strong first half of the year, we expect capital markets revenue to be more muted in the third quarter due to deal-specific factors. As we look to the end of the year, we expect capital markets activity to accelerate into 2025 as our new investment pipeline remains strong, and we begin to see the benefits of integrating our broker-dealer capabilities into our credit platform. We reported fee-related earnings of $201 million for the second quarter, up 60% year-over-year. Our FRE margin of 44% in the quarter was above trend as we benefited from incremental catch-up fees, strong transaction fees, and lower-than-expected cash compensation due in part to the timing of hiring. As we’ve indicated previously, we continue to expect our full year FRE margin to exceed 40% in 2024 and expand in 2025 as we benefit from increased credit deployment and the activation of several new funds, most notably our second Rise Climate fund. After-tax distributable earnings for the second quarter totaled $207 million or $0.49 per share of Class A common stock. This included $26 million of realized performance allocations, which was largely driven by credit and real estate. Although exit activity remains muted for the industry and for TPG and has been slower to recover compared to deployment, we’re actively evaluating monetization opportunities across all of our portfolios. Our realized investment income and other line item in the second quarter included $5 million of non-core expenses related to Angelo Gordon, which declined from $8 million last quarter as we continue to make progress on our integration work streams. We expect our integration expenses to remain at around this reduced level through the balance of the year. Turning to our non-GAAP balance sheet, TPG remains well capitalized with moderate leverage and ample liquidity. We ended the second quarter with $330 million of cash and cash equivalents and $1.2 billion of undrawn capacity on our revolver, providing us with significant flexibility to continue investing in growth. Our net accrued performance balance stepped up to $929 million at the end of the second quarter. Our performance eligible AUM totaled $198 billion or 86% of our total AUM, of which $158 billion is currently generating performance fees. Our investment portfolio has continued to perform well with positive value creation across all of our platforms for the second quarter and over the last 12 months. Our private equity portfolio, which includes our capital growth and impact platforms, grew revenue by 18% over the last 12 months, and margins have remained stable as inflationary pressures have moderated. Our private equity strategy is characterized by deeply thematic growth-oriented investing, where we believe we can inflect growth in our portfolio of companies that will outpace any potential multiple compression. This disciplined approach has resulted in significant strength and durability against a volatile macro backdrop over the last 24 to 36 months. And our PE portfolio appreciated approximately 2% in the second quarter and 7% over the last 12 months. Turning to credit, our portfolio appreciated approximately 3% in the quarter and 14% over the last 12 months. In Middle Market Direct Lending, all of our funds were at or above their target return ranges as of quarter-end. Overall, our portfolio of more than 260 companies continues to perform well with strong revenue growth and cash flow generation and no realized losses in the quarter. At the end of the quarter, our weighted average loan-to-value at close was 41%, which is consistent with historical levels. In Credit Solutions, as spreads have tightened, the team has continued to aggressively monetize public positions across the portfolios and crystallize gains. We’re now pivoting into private transactions where we believe there is a more attractive return profile, particularly on a risk-adjusted basis, given significant downside protection in these customized financings. This purposeful approach has resulted in accelerated realizations relative to deployment as private deals have a longer execution timeline. As John mentioned, we’re currently evaluating the largest pipeline of private transactions ever for the strategy and expect deployment to increase in the back half of the year. TPG’s real estate portfolio appreciated approximately 1% in the second quarter and 2% over the last 12 months. And TPG AG’s real estate portfolio appreciated 20 basis points in the second quarter and 70 basis points over the last 12 months. Focusing on TPG real estate for a moment, the positive value creation in the quarter is attributable to the quality of our portfolio construction in highly attractive sectors. This includes light industrial, student housing, and data centers, which continue to see strong secular demand, supply limitations, and rental rate growth. Capitalization rates and discount rates remained flat to slightly down in our core thematic areas as the availability of debt and equity capital has increased this year, driving more transaction volume. As a result, we’ve been opportunistically monetizing high-quality assets across our light industrial build-to-rent and student housing portfolios. Turning to fundraising, we raised $6.3 billion during the second quarter, as John mentioned, with $4.5 billion of this capital raised in credit. Looking forward, consistent with our prior guidance on fundraising, we continue to expect credit fundraising to exceed $10 billion for the year, more than doubling the capital raised in 2023. We’ve raised $6.6 billion for our credit strategies through June, so we’re pacing ahead of this objective. In addition, we expect our total private equity and infrastructure fundraising in 2024 to grow compared to $12.8 billion we raised in 2023, driven by the ongoing campaigns for growth and Rise climate as well as the launch of our climate transition infrastructure strategy. We’ve raised $3 billion in the first half of this year, which is consistent with our expectation that these campaigns will be weighted to the back half of the year. As John mentioned, we have significant momentum toward a strong first close for our new Rise Climate Fund and expect to have more to report on our next call. We held a final close in July for our Life Sciences Innovations Fund, bringing total capital raised to $580 million for the overall strategy, which includes a portion of commitments from the Rise fund. We’ll also hold a final close for our inaugural GP Solutions fund in the third quarter. And we expect to hold a first close for our Rise Climate Transition Infrastructure Fund before year-end. Wrapping up, we’re very pleased with our strong second quarter results and the progress we continue to make driving growth and diversification across our business. Our investment portfolios are performing well, and we’ve been selectively pursuing monetization opportunities. At the same time, we’ve been deploying capital at a steady pace and with $53 billion of dry powder, we’re well positioned with a robust pipeline of opportunities across our diverse platforms. We’re continuing to experience strong momentum across our active fundraising campaigns in our private equity and credit businesses, and we’re leveraging our culture of innovation to drive a variety of exciting growth initiatives that have the potential to build significant scale and long-term value. Now I’ll turn the call back to the operator to take your questions.

Thank you. Our first question will come from Alex Blostein with Goldman Sachs. Please go ahead.

Hi, good morning, everyone. Thanks for the question. I want to start with credit. So at a high level, trends sound pretty good on both deployment and the fundraising side, but obviously, the banking line was flat sequentially. Could you help bridge some of the offsets in the quarter? And then, more importantly, talk a little bit about your growth outlook in credit with respect to management fees and fee-paying AUM over the next 12 months? Thanks.

Sure. Alex, it’s Jack. I’ll start on that. On the quarter, the reason the fee-paying AUM was relatively flat quarter-over-quarter is that, as you’d expect, the $4.5 billion of credit capital we raised during the quarter really, none of that was accounted for as fee-paying AUM as we deploy it. So that’s why you saw AUM growth quarter-over-quarter, but really no FAUM growth. And that’s why to my comments, the AUM subject to fee step-up increased so much quarter-over-quarter. So that’s how I would think through that bridge. Now we do expect accelerated FAUM growth in credit as we work through the next year and deploy the capital that we just raised in the first and second quarters, and we expect to continue raising in the back half of the year.

And Alex, I guess the only thing I would add to that on the deployment outlook going forward is, I think you heard in our comments, what we have going on at Twin Brook and our direct lending platform. We’re on a record pace by a meaningful margin in terms of the uptick in activity in the lower middle market sponsor space. And when you look at the originations there, one interesting dynamic to it is that somewhere around 40% of the origination volume there is essentially add-ons to the existing portfolio. So, the base portfolio that Jack had referred to in his comments continues to generate a substantial amount of inherent growth in the portfolio beyond the 60% of the growth that’s basically new buyouts. On the Credit Solutions side, as I mentioned, our essential housing business is very active. Jack mentioned in his comments that we are actively liquidating and selling most of our public book that we accumulated over the course of 2023 and early 2024, and given spread tightening and the contraction in spreads. You can see what the value creation looks like in that book. But essentially, we spent a lot of time monetizing the business as we pivot to private opportunities. And just to give you an idea of the flow of that, we’re engaged with many sponsors around the market and we sort of measure that flow and backlog by the number of NDAs signed. So far this year, we have signed 160 NDAs, which is double our prior flow. Naturally, those transactions are more bespoke, more structured, and take longer to get done. However, we expect to see an uptick in deployment around those opportunities. And particularly, with the increase in volatility in the market. Lastly, on the structured credit side, we’re seeing now with the potential for interest rates to come down a number of transactions with risk transfer occurring among various banks, resulting in increased partnerships with a number of financial institutions. We're actively trying to pace ourselves for growth in our capital formation process in the second part of the year for our structured credit business.

Our next question will come from Craig Siegenthaler from Bank of America. Please go ahead.

Good morning, John, Jack. I hope everyone is doing well. We have a modeling question on the fee-earning AUM quarterly roll for credit. You raised $4.5 billion and you also invested $4.5 billion, but fee-earning AUM only grew by $200 million, and the inflow is just $300 million. So I know I just threw a lot of numbers out there, but my question is why didn’t fee-earning AUM in credit grow faster in the quarter, just given how big the fundraising and deployment numbers were? What am I missing?

Craig, the $4.5 billion of capital we raised during the quarter, really none of that shows up as fee-earning AUM as of the end of the quarter. It was raised, it’s dry powder ready to invest, but it doesn’t flow into fee-earning AUM until deployed, which will happen in subsequent quarters.

Got it. But you also invested $4.5 billion of prior capital. So wouldn’t that have triggered fee increases?

Right. I’m just looking for the number. That should – I think it was definitely offset by realizations during the quarter.

Got it.

We can follow up with you.

Our next question comes from Michael Cyprys with Morgan Stanley. Please go ahead.

Hey, good morning. Thank you for taking the question. Maybe just sticking with credit and the AG deal. You mentioned some overseas investors coming into the Twin Brook fund, indicating some distribution synergies happening there. Could you elaborate a bit on some of the synergies you’ve realized so far from bringing Angelo Gordon into the franchise? And as you look to the next 12, 24 months, could you provide your latest thoughts on synergies that you’d expect to drive across the business going forward? And I know one of the things you’re looking to do is to help the AG credit business move up-market a little bit. So, can you also update us on where that initiative stands? Thank you.

Yes. Thanks, Mike. On the fundraising side, we have experienced what I think of as a fair amount of crossover between our LP bases. As part of the underlying thesis and growth drivers for the AG acquisition, we felt that this would be a major opportunity for us in terms of being able to cross-sell into historical pools of capital that haven’t participated with AG, and also just the size and scale that these pools of capital represent. So that really is beginning to take shape. If you look at the Twin Brook fundraise, there are several cases where we’ve been able to successfully partner between our two fundraising groups, leveraging large pensions and particularly international penetration. If you look at the footprint of TPG’s LP base and the existing footprint of AGs at the time of the acquisition, TPG’s global scale was quite a bit larger. We’ve been happy with the progress in the Asia region, the Middle East, and Europe. I expect you’ll hear from us as we continue to form capital. We're seeing similar outcomes across the platform from Twin Brook to Credit Solutions to structured credit. I also think you'll continue to hear from us as we report on the progress we expect to make in terms of credit integration. One of the new strategies we are in the process of launching is called hybrid solutions, which involves a coalescence of our credit and private equity strategies, allowing us to leverage both credit expertise and our understanding of portfolio companies. We believe this cohort will yield continued success.

Hey, Mike, it’s Jack. Just a little more data for you on the Twin Brook fundraising migration. If you look at the last fund, Fund IV versus Fund V, the U.S. represented about 61% of Fund IV LP base, and this went down to 36% in Fund V, replaced by significant growth in the Asia Pacific as well as Europe and the Middle East. Insurance companies represented only 6% of the LP base in Fund IV and 29% in Fund V, while sovereign wealth funds went from 1% to 17%. I think these numbers give you a real sense for the kind of synergy we’re seeing on distribution. The closed-end fund MDL5 is not the end of fundraising for Twin Brook. We continue to have several large SMAs in the process of being raised that will sit alongside MD as additional sources of capital, and those SMAs are oriented toward our large historical client base as well.

Great. Thank you so much for all the color. Appreciate it.

Our next question will come from Ken Worthington with JPMorgan.

Late hiring and catch-up fees boosted margin this quarter. Were there any unusual other unusual items impacting compensation? And is the delayed hiring expected to be resolved later this year? And then on margin as well. As we think about Angelo Gordon, I know the focus has been on top-line growth and things look great, but are there also efficiencies you’re bringing to the AG platform that have contributed to the improving margins you’re seeing at TPG?

Sure. I think, Ken, you broke up a little bit at the beginning of your question, but I think I got the gist of it. On the margin profile, in particular, you asked about the comp expense in Q2. I think last quarter we mentioned that our comp expense in Q1 was unusually high due to elevated RSU-related expenses, and that will be flowing through as a seasonal factor in Q1 each year. Stepping down off of that number was not unexpected. The other piece of it that I referred to is that we are in the process of hiring to expand the business in all the ways we’ve talked about. Much of that hiring did not, to answer your question, kick in until Q3 and Q4, so I would expect comp expense line to normalize in Q3 and Q4. On the cost synergy side, this transaction was never premised on cost synergies; we’re focused on revenue synergies instead, and we’re optimistic about that. At this point, we believe we’ve realized at least $30 million of cost synergies, and we intend to invest most of that back into expanding product development and distribution capabilities.

I’d like to add that in terms of integration and the functioning of the organization, we have executed a full integration of all our services functions, operational functions, etc. So that is basically completely done and is working very smoothly. In terms of being able to benefit from scale as we grow, we feel that the full integration and the capabilities of the two firms combined will support that as well.

Our next question will come from Glenn Schorr with Evercore. Please go ahead.

Hi, thanks very much. Hello. I was hoping for a little color on Twin Brook. Your track record is great. You mentioned all senior secured first lien, good covenants, almost no loss as ever. So I don’t feel bad asking a question about some people thinking of a middle-market player that plays in a $24 million average EBITDA range, more at risk in a client base that’s more at risk in a decelerating economic backdrop. Could you talk about the control aspects and why that hasn’t been the case in the past?

Yes. That’s a good question, Glenn. Thank you for that. It’s a timely question because I just got back a week ago from spending a few days in Chicago with our Twin Brook team and digging into all aspects of what we’re doing there. It was a great opportunity to deeply understand the portfolio. You’re correct in saying that, in general, smaller companies are considered riskier than larger companies. However, when you look at how Twin Brook operates, I would underscore a few points. One is that the relationships we have with the middle market sponsors are deep and based on long-standing history. We have a good understanding of their perspectives on value and how they manage their portfolios. This partnership-oriented focus allows us less transactional interactions because we’re involved in covenant structures and engagement processes. Every time we engage in repayment situations or complex structures, we understand the factors at play, and we can address them proactively. The loans start with lower leverage ratios compared to larger buyouts, and our pursuit of responsible lending and structured support, paired with regular communication, allows us to rely on an early warning system to identify stress points quickly. We regularly review portfolios and have mechanisms to monitor covenant adherence which, overall, brings our loss ratios down.

That’s great color. Thank you.

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

Thank you and good morning. I want to ask about real estate. It looks like pretty balanced deployment in the quarter. And from the tone of Jon’s comments, it seems like maybe you are leaning in a little bit, my words, but I appreciate your take on kind of the opportunity set there, how you are managing risk given some lingering uncertainty? And also, if you could, maybe a few words on the complementarity of the TPG AG real estate capability with the legacy TPG capability. Thanks.

Yes, that’s a good question. To start with the complementarity, our businesses both have long histories and distinct approaches to real estate investing. The TPG Real Estate franchise, or TREF, operates as an opportunistic high-return strategy, targeting capital deployment in the range of $100 million to $400 million. We are focused on acquiring platforms, often with embedded operating capabilities. TPG AG’s real estate franchise has cultivated a 25- to 30-year history of partnering with operating partners, focusing more on value-add real estate strategies, with equity checks ranging from $25 million to $75 million. Each business has distinct methodologies but benefits from broad market knowledge. As a well-capitalized entity, we have $14 billion of dry powder to take advantage of the opportunities that arise in real estate. Historically, we were cautious at the beginning of the rising interest rate cycle, anticipating that stress would create interesting investment opportunities. As expected, we’re now seeing a significant increase in investment activity, and as a result, we have started to ramp up our capital deployment. We strategically deployed during the second half of 2023 and have continued to do so in 2024, focusing on sectors such as light industrial and student housing that we find fundamentally attractive.

Excellent. Appreciate both parts of the answer. Thank you, Jon.

Our next question comes from Brian McKenna with Citizens JMP. Please go ahead.

Okay. Great. Thanks. So, you have deployed a good amount of the capital that you raised for your latest flagship capital strategies, and performance for all those vintages has been really strong out of the gates, with net returns of at least 20%. So, given the strong performance, and nearly 50% of the capital raised for these funds has been deployed, how should we think about the timing and potential demand for the next round of capital funds?

Great. Well, Brian, thank you for the question. It’s Todd. As you pointed out, for the TPG Capital fund focusing on the U.S. and Europe, we have signed or completed 10 investments so far, and it’s an interesting portfolio. To your point, the majority, or two-thirds, are a mix of corporate carve-outs with structured partnerships that provide very interesting risk-reward dynamics. We’re excited about both the portfolio and deployment pace. Our pipeline also remains robust. To your specific question, we’re on track for deploying this fund within the 3 to 4-year target timeline, which would likely put us in the market to commence our next fund raise around the first half of 2025.

Our next question will come from Dan Fannon with Jefferies. Please go ahead.

Thanks. Good morning. Jack, one more for you on margin, I understand the comments for this year. But as you think about the scaling of some of the funds you mentioned, as well as transaction fees, what is a reasonable expectation as you balance investing for margin expansion? Where do you think we are headed next year compared to your guidance for this year?

Yes. Thanks for the question, Dan. We haven’t put out specific guidance other than to say that this year we expect to be kind of a baseline off which we will grow. If you think about the levers of margin expansion, they are really driven by operating leverage and revenue growth. If you consider the capital we are raising this year, much of it is not flowing into FAUM yet, particularly on the credit side. As we deploy that, you’ll see the emergence of fee income from those investments. Additionally, the large climate-related funds we are raising will pay fees on committed capital, and these will only activate later this year, thereby resulting in full annualized fee income next year. We believe this combination will support a resumption of FRE margin growth next year, with the goal of returning to our initial target of 45%. We haven’t yet put a specific timeline on that.

Got it. Thank you.

Our next question comes from Bill Katz with TD Cowen. Please go ahead.

Hey. Thank you very much for squeezing me in. Just coming back to fee-paying or fee-earning AUM just in general. If I look at the last couple of quarters, it’s been relatively flat at around $137 billion. I appreciate you have a couple of vectors of growth over the next 12 months, 6 months to 18 months. If you think that realizations are going to pick up, could you walk me through the path of how fee-paying AUM will grow from here? And Jon, I understand you mentioned the plan to raise $40 billion over the next 5 years. Could you clarify the pro forma number you are comparing that against through June of this year? Thank you.

Hey Bill. Let me take the first part of that. On the FAUM role going forward, the significant pickup we expect in credit deployment will flow from AUM into FAUM. The minute we activate these big new pools of capital on the climate side, it will create a significant step-up in FAUM. That will be partially offset by realizations, but we expect these positive drivers to more than offset the realizations. The reason we expect FRR growth next year is that the net of all this will likely drive FAUM growth throughout 2024.

On the latter part of your question, Bill, we can follow up with you just to ensure that you understood my comment. From 2021 until the end of 2025, we expect to raise approximately $40 billion. This timeframe encompasses new strategies, pro forma for TPG AG, and includes our Rise Climate franchise expanding into infrastructure and widening our real estate footprint across asset classes and regions, including Japan, scaling our GP-led operations, and growing our credit platform. We will definitely reach out to provide clarity on those components.

The other point to keep in mind regarding realizations is that if we sell a position that has generated substantial value, it earns fees based on actively invested capital; the dropout from FAUM in those cases is substantially less than the nominal amount sold.

Thank you.

Our final question will come from Brian Bedell with Deutsche Bank. Please go ahead.

Great. Thanks very much for squeezing me in. Also maybe just to revisit the Rise Climate and climate infrastructure franchise. Obviously, you have developed a fantastic brand here over a long period. Can you talk about how you might be thinking about retail product development, and if there are opportunities in this space, given it’s not really well-penetrated in this area on a retail basis across other alternatives? Jack, you mentioned that some of the cost savings will be reinvested in product development. Could you elaborate on the extent of this focus on this platform? Also, I think you mentioned an infrastructure debt capability that you’re looking into developing as well, if you could comment on that?

I would like to make a quick comment before turning to Jim. We are actively working on launching our first semi-liquid private equity vehicle, expected by the start of 2025. This semi-liquid structure will allow us to offer distinct investment opportunities. As we compile our offerings from across our private equity franchises, climate investments will certainly be a compelling component. We anticipate that our climate franchise will further distinguish this offering.

Yes. Hi. First, we expect retail demand for this product to be strong. In fact, we are launching the channel for regular fundraising for TPG Rise Climate. I scheduled a series of one-on-one meetings across Texas, which will be interesting in climate discussions, but the demand trends highlight the overall interest in this space. We believe there are substantial opportunities to expand the distribution of our climate-related platform products. As Jon mentioned, this differentiator will encapsulate a significant portion of our semi-liquid products.

Great. That’s great color. Thank you so much.

And this will conclude the Q&A portion of today’s call. I would now like to turn the call back to Gary Stein for closing remarks.

Great. Thanks operator and thanks everyone for joining us today. We look forward to speaking with you again next quarter. In the meantime, if you have any questions, please feel free to follow up with the IR team.

And this concludes today’s TPG second quarter 2024 earnings call and webcast. You may disconnect your line at this time, and have a wonderful day.