Earnings Call Transcript
TPG Inc. (TPG)
Earnings Call Transcript - TPG Q3 2022
Operator, Operator
Good morning, and welcome to TPG's Third Quarter 2022 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 begin.
Gary Stein, Head of Investor Relations
Great. Thanks, operator. Welcome to our third quarter 2022 earnings call. 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 with us and will be available for the Q&A portion of this morning's call. Before we begin, 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 are presenting GAAP measures, non-GAAP measures and pro forma GAAP and non-GAAP measures, reflecting the reorganization that was completed during 2021 and immediately prior to TPG's IPO. We believe it is helpful for investors and analysts to understand the historic results through the lens of our go-forward structure. Please refer to TPG's earnings release for details on the pro forma financial information. We will also be discussing certain non-GAAP measures on this call that management believes 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 the company's 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 of $37 million and after-tax distributable earnings of $113 million or $0.30 per common share. We also declared a dividend of $0.26 per common share of Class A common stock, which will be paid on December 2 to holders of record as of November 21. I'd now like to turn the call over to Jon Winkelried, Chief Executive Officer.
Jon Winkelried, CEO
Thanks, Gary, and good morning, everyone. We're excited to share our strong third quarter results today. For the quarter, we generated strong sequential growth in fee-earning AUM, fee-related earnings and value creation across our portfolio. Jack and I will take you into further detail for the quarter. But before we do that, I'd like to share some thoughts this morning on the market we're operating in and our position as a firm. Investors have heard a lot during this earnings season about the macroeconomic and geopolitical environment. It's a complex time in the markets generally. However, periods of market dislocation like this create opportunities, so I'd like to focus on what this means for TPG. We've been preparing our business for this type of environment for some time. Investors can see this in our results, including the substantial realization cycle we began several years ago, our record dry powder and the innovative investment strategies we have developed. Despite a challenging market backdrop, our current portfolio, which has been built around our core thematic areas, continues to perform well. Our prudent use of leverage to support the growth orientation of these companies has made our portfolio less sensitive to the effects of rapid interest rate increases. And while we are not immune to inflationary pressures in labor costs, we manage a portfolio which has been constructed by targeting businesses with high intellectual property and strong secular growth in sectors such as health care, technology and climate. We are disciplined, patient investors and careful stewards of the long-dated capital we manage. We focus on investing in leading businesses at attractive valuations and finding creative solutions for companies in need of capital. We have a long and successful history of stepping forward in complicated moments like this to drive returns, and we believe we are set up to do so in this environment. There is a significant opportunity in our pipeline, and we believe TPG is well positioned to continue to execute. There are a few points I'd like to highlight in our results. Our financial performance in the third quarter reflects the durability and strength of our FRE-centric business model. TPG generated significant quarter-over-quarter growth in management fees, operating margins and FRE. This is a direct result of the stable growth of our fee-earning assets under management as we continue to scale our business. Our third quarter fee-related revenues of $282 million grew 10% sequentially. Fee-related revenues for the last 12 months exceeded $1 billion for the first time in TPG's history. Approximately 90% of these revenues were from stable and growing management fees. FRE in the third quarter of $121 million grew 19% compared to the second quarter. Our total AUM was $135 billion at quarter end, which increased 24% year-over-year. This step-up was driven by strong fundraising activity across our business, including our first closing in the quarter for TPG's flagship Capital Asia Fund and the completion of the first closes for several other flagship funds, including TPG Capital Partners, Healthcare Partners and Rise. In aggregate, we raised more than $8 billion during the third quarter and $29 billion over the last 12 months. We're very pleased with the success of our ongoing campaigns, particularly amid the well-discussed headwinds GPs are facing in the fundraising market. Given the success of our ongoing fundraising campaigns, we had a record $46 billion of capital available for investment at the end of the third quarter. This is up 18% sequentially and represents 57% of our fee-generating AUM. We believe our fundraising progress and record dry powder leaves us well positioned to play offense and drive returns. Over the last few years, we capitalized on the attractive valuation environment and aggressively sold assets. We have deliberately moderated our pace of realizations, given the market dislocation. And we've been positioning our portfolio companies for continued growth, generating value creation of 2% for the quarter and 13% for the last 12 months. This strong relative performance reflects the high-quality, resilient portfolio we have constructed around our long-term sector-based themes. We've been anticipating a downturn for some time and have been consistently building multiple compression into our financial models. Our focus has been on investing in industries with durable secular trends that can continue to drive growth through the cycles. Although our investment pace slowed in the third quarter, consistent with the broader market activity, we're seeing increasingly interesting opportunities to invest in high-quality companies. We're currently in an adjustment period where sellers' valuation expectations are resetting lower, and transaction levels may remain softer for a while longer. We will continue to be patient and highly selective. We are starting to see valuation expectations begin to align, and we believe we're in a strong position to deploy capital given our significant pool of dry powder. With that in mind, I'll highlight some recent investments we've made across our business, starting with the health care sector, where we are one of the world's largest and most active private equity investors. Shortly after the third quarter, we completed several health care investments with a combined enterprise value of more than $9 billion, with TPG investing approximately $3.5 billion of equity. Notably, our in-house capital markets team had a lead arranger role in raising all $5 billion of the debt for these transactions at attractive terms in a difficult financing environment. We believe our capital markets capabilities continue to provide us with a significant competitive advantage and enable us to access financing even during periods of extreme volatility when banks are largely sitting on the sidelines. Leveraging our carve-out expertise, our capital funds acquired ClaimsXten, which is a leading claims editing software platform that was divested from the merger of United and Change Healthcare. We also completed the take private of Covetrus, a leading animal health distribution and technology platform and the acquisition of DOC Generici, an Italian specialty pharmaceuticals company. Our Capital Asia Fund just completed the acquisition of iNova Pharmaceuticals, a leading independent consumer health care company in the Asia Pacific region. iNova is the inaugural investment from TPG Capital Asia VIII and highlights the strength of our Pan-Asian platform, with the transaction representing a cross-border underwrite across our Australia and Southeast Asia teams. We're seeing significant momentum and opportunities across other parts of our business, including our impact and growth platforms where we have built and scaled several innovative funds. In climate, the combination of the recent Inflation Reduction Act, energy prices and growing concerns around energy security have substantially increased investment into the sector. Since its inception just over a year ago, our Rise Climate Fund has already deployed $2.2 billion and currently has a robust pipeline. During the quarter, Rise Climate invested in Monolith Materials, which is a global leader in clean hydrogen and carbon black. And just after the quarter end, Rise announced a follow-on investment in Form Energy, which is developing and commercializing next-generation battery technology. Second, I want to highlight our tech adjacencies fund, which we created to provide bespoke solutions for the tech marketplace. With IPO expectations delayed and prices resetting meaningfully, we are seeing significant opportunities to deploy the $2.6 billion of new capital we have already closed on for this fund. We have a couple of significant transactions that we hope to be closing shortly. I'd like to also touch on real estate. Rising financing costs as a result of government interest rate policy are leading to valuation adjustments and market dislocation. As a result, deployment has moderated considerably. However, our fourth opportunistic fund just closed on $6.8 billion of new capital, over 80% larger than our prior fund. So we believe we are well positioned to take advantage of opportunities as markets adjust. Furthermore, our team's focus on select themes, primarily driven by long-term secular demand drivers, has resulted in less than 5% of the total remaining invested equity across all of our vehicles being invested in the office and retail sectors, both of which are also experiencing considerable headwinds. Despite the challenging backdrop over the last six weeks, we've been able to monetize several real estate investments in the U.S. and Europe at attractive prices. Before I hand the call over to Jack, there are two additional items I'd like to highlight regarding the broader TPG ecosystem. First, we were pleased to announce that TPG Rise was recently named to Fortune's 2022 Change the World list. This annual list acknowledges companies that have had a positive social impact through activities that are part of their core business strategy. We're proud to be included alongside a number of inspiring companies such as PayPal, Walmart, NVIDIA, GoFundMe and DeepMind. Importantly, we are the first global private equity firm ever to be recognized for this prestigious honor. Second, we recently hosted our annual meeting for our capital funds. This was our first in-person conference with our capital limited partners since 2019, many of whom are invested in multiple strategies across the firm. We shared our most compelling investment themes, reviewed the status of our portfolio and highlighted the deep venture talent across our capital platform. We also had senior team members in attendance from all of our other product areas and had an opportunity to engage with our LPs on those strategies as well. We're proud of the trust they placed in us and look forward to our continued partnership. I'd now like to hand the call over to Jack, so he can take you through our financial results.
Jack Weingart, CFO
Thanks, Jon. Good morning, everyone, and thanks for joining us for the call this morning. The firm's third quarter financial results demonstrate the strength and resilience of our business. We continue to make good progress through our significant fundraising cycle, driving a sequential increase in fee-earning AUM, management fees, and fee-related earnings. Our investment performance remains strong despite the volatile markets, leading to an increase in net accrued performance allocations. Now I'll provide more detail on each of these metrics. Our total AUM grew from $127 billion to $135 billion during the quarter, a 7% increase for the quarter and 24% compared to $109 billion at the end of the third quarter of 2021. The main contributors to this year-over-year increase were $29 billion in capital raised and $15 billion in value creation from our underlying fund investments, partially offset by $18 billion in realizations. Fee-earning AUM rose from $67 billion to $81 billion during the quarter, representing a 21% increase for the quarter and 37% compared to $59 billion at the end of the third quarter of 2021. This 37% increase year-over-year was primarily driven by nearly $24 billion raised in fee-earning capital across our platforms, including new flagship funds for capital, health care partners, Asia, real estate partners, and Rise. As of September 30, 89% of our AUM and 90% of our fee-earning AUM were in either perpetual or long-dated funds, with a duration at inception of 10 years or longer. Additionally, 84% of our fee-earning AUM had a remaining duration of five or more years at the end of the quarter. We had nearly $11 billion of AUM subject to fee-earning growth, 60% of which was not yet earning fees at the end of the quarter. Our strong organic growth in fee-earning AUM has fueled a 23% year-over-year increase in management fees, totaling $255 million in the third quarter. Total fee-related revenue saw a slower growth rate of 7% year-over-year, reaching $282 million due to a reduction in transaction fee revenue compared to last year's third quarter. However, as Jon mentioned, we finalized several new investments last month, with significant involvement from our debt capital markets team, leading us to anticipate an increase in transaction fees for the fourth quarter. Our FRE grew by 19% compared to the second quarter, driven by a 14% increase in management fee revenue and a continued expansion of our FRE margin, which increased by 300 basis points sequentially to 43% for the third quarter. As we've indicated before, we expect our FRE margins to keep expanding as we capitalize on ongoing scale and operating leverage, aiming for a target of 45% by the end of next year. We are ahead of plan regarding that target. Our after-tax distributable earnings for the third quarter were $113 million, reflecting the slowdown in year-over-year realization activity previously discussed. As Jon mentioned, we have moderated our pace of monetizations as we focus on driving growth and value creation within our relatively young portfolio. Importantly, this combination of lower monetization pace and strong value creation led to a 7% increase in net accrued performance allocations during the quarter. Alongside our third quarter results, we announced a quarterly cash dividend of $0.26 per share of Class A common stock, representing 85% of TPG's after-tax distributable earnings, primarily driven by FRE. We have distributed $1.09 in cash per share of Class A common stock for the first three quarters of the year. Despite the challenging macroeconomic environment, the fundamental performance of our portfolio companies remains robust, generally exhibiting above-market revenue and EBITDA growth. We attribute this growth to our hands-on approach and thematic sector-based investing in areas with compelling growth trends. This strong performance fueled a 2% increase in value creation for the quarter and a 13% increase over the past year. Turning to the non-GAAP balance sheet for the TPG Operating Group as of September 30, we are well capitalized with $572 million in cash and $450 million in long-term debt. During the third quarter, we increased our undrawn credit facility from $300 million to $700 million to enhance our financial flexibility. Our net accrued performance allocation balance, as I mentioned, represents the 20% allocation to the TPG Operating Group of $725 million. The increase from $677 million at the end of the second quarter is primarily due to $53 million in unrealized value creation. A significant portion of our net accrued performance allocation balance at September 30 relates to the sale of Wind River, which we have discussed previously. This transaction is under regulatory review, and we are still aiming to close it by the end of the year. Additionally, as of September 30, $122 billion or 90% of our AUM was eligible for performance allocations. Moving on to fundraising, we raised more than $8 billion in capital during the third quarter and $29 billion over the past twelve months. I'd like to provide further detail on our various fundraising campaigns. On our capital platform, we aimed for a first close for our flagship Asia fund in the third quarter, successfully raising $3.4 billion, bringing us over halfway toward our $6 billion target. We also raised an additional $2.6 billion for our flagship TPG Capital and Healthcare Partners funds, bringing the combined total to $10.6 billion out of an $18.5 billion combined target. On our Impact platform, we closed on an additional $600 million for our Rise Fund during Q3, achieving a total raise of $1.9 billion against a $3 billion target. For our real estate platform, we reached the hard cap for our fourth opportunistic fund as anticipated, completing fundraising with total capital commitments of $6.8 billion, which is 83% larger than the previous fund. Lastly, we gathered around $1 billion for our Market Solutions platform, including key first closes for two funds focused on GP-led secondaries: NewQuest in Asia and TGS in North America and Europe. Going forward, we are concentrating on three areas of fundraising: completing our active campaigns, launching our next growth fund by mid-next year, and exploring several additional organic growth opportunities. We expect fourth quarter fundraising to be limited as many LPs have fully allocated their budgets for the year. However, we have a strong backlog of LP interest in our funds and anticipate successfully completing our active campaigns next year when clients access their 2023 budgets. Before we take your questions, there’s one more item I want to address. In planning and executing our successful IPO earlier this year, we aimed to bring TPG public during a period of significant growth that we could share with public investors. An essential goal was to create a publicly traded security with sufficient liquidity for a broad base of shareholders. Last week, our Board took steps to modify the voting power of our Class A common stock. We expect this change to become effective before the end of the year, allowing TPG to qualify for inclusion in the large Russell family of indices during the next spring rebalance. We are proud of our strong third quarter results and the momentum we are generating across our business. We believe our investment portfolios are performing well amid the evolving market backdrop, and we are working closely with our portfolio companies to build long-term value. Additionally, we continue to foresee strong growth in fee-generating assets under management and fee-related earnings as a result of our ongoing broad-based fundraising campaigns. With that, I would now like to turn the call back over to the operator to take your questions.
Operator, Operator
We will take our first question from Craig Siegenthaler with Bank of America.
Craig Siegenthaler, Analyst
So I think the biggest conversation point with investors today is portfolio valuations, especially given your sector positioning with heavy overweights in software and business services. And for example, I think some of us like to look at the public markets and the software. The iShare software ETF is down about 40% year-to-date versus TPG's positive 10% mark in the capital business. So my question is, how are the underlying EBITDA and revenue growth trends through September 30 across both the capital and growth portfolios? And also, has TPG been adjusting valuation multiples, given the higher discount rate backdrop combined with lower valuations exhibited in the public markets?
Jon Winkelried, CEO
Yes, Craig, Todd is going to provide more details for you in that area. So please go ahead.
Jack Weingart, CFO
Before Todd goes to the operating performance, Craig, I'll address the second part of your question. We absolutely look at multiples every quarter along with lots of other data, and we have been bringing multiples down. Todd will give you a sense for the operating performance.
Todd Sisitsky, President
Craig, thanks for the question. Overall, the portfolio really continues to perform quite well, and we're experiencing strong underlying growth. Just looking at the third quarter, for example, in the TPG Capital U.S. and Europe business and the TPG Capital Agent business, which just tends to be our more mature, larger check businesses, in the U.S. business, third quarter year-over-prior third quarter year results, revenue was up in the high 30s. Now that was impacted by the fact that COVID had a rebound effect from the third quarter 2021 COVID effect, but still very strong growth. The Asia business over that same time frame in active funds was up 22%, 24%, depending on which fund, so good, steady result. I think this is, as Jon was sharing, this is the result of having invested in teams and sectors that are tied to secular growth, particularly over the last several years, anticipating a downturn. Looking forward, because we spend a lot of time on these portfolio companies, not just looking at historical results, but some of the forward indicators, what we're seeing is health care for the most part continued to rebound in volumes post COVID. Software enterprise technology, decision cycles are taking a bit longer there, so it's a little harder to get large deals over the finish line. Growth continues, but it takes a little longer. It actually provides an advantage for incumbents, but a little more challenging, a little slower for the attackers. Climate has strong growth trends driven by the IRA, energy prices, and growing concerns about energy security, internet digital media, persistent demand for content, a little softness in ad sales beginning into this year. The consumer has been a little bit divided with strong resilience at the higher end, a little more pressure on the lower-end consumer. So we're watching all of this real-time, but for the most part, we're very well positioned relative to spaces we're in and the neighborhoods we've invested behind.
Operator, Operator
We will take our next question from Alex Blostein with Goldman Sachs.
Alexander Blostein, Analyst
Can you guys hear me? Hello?
Jon Winkelried, CEO
Yes.
Alexander Blostein, Analyst
All right. Perfect. Sorry, I was on mute, I guess, before. So I wanted to start with, I guess, just the conversation around the fundraising backdrop. Obviously, we've spoken, I feel like since January of this year about the difficulties that the private equity industry is facing when it comes to fundraising. You guys seem to be on track with your larger flagships, but curious if you could help us sort of level set on how you think 2023 is likely to evolve. Again, the cumulative dollars sound the same, but maybe just give us a sense of the timing of kind of how you think that's going to sprinkle across the year. And also, you alluded to several new organic growth opportunities as you look out into 2023. I was wondering if you could expand on what those are.
Jack Weingart, CFO
Sure. Thanks, Alex. Look, I think we started talking about this in the first quarter. And since then, it's become a pretty topical issue for the industry. And things were playing out about as we would have expected. I mean, LPs remain in certain regions of the world overallocated for all the reasons we talked about. A lot of GPs are extending fundraising campaigns into next year. We've been planning to do that the whole time as we've been talking about. I think next year will remain challenging throughout most of the year for all the same reasons. There was an element of GPs kind of pre-launching fundraising campaigns coming into this year who didn't necessarily need the capital yet, and that kind of opportunistic fundraising launch will not happen next year. I think you'll see a bit of an abatement in the number of GPs in the market as next year unfolds. But I think next year will remain crowded. As you point out, we remain really on track. We're very pleased with the $26 billion we've raised year-to-date. It's tracking ahead of what we would have told you at the IPO was our expectation for the year as about a 50% increase relative to the same three-month period the prior year in a market where aggregate fundraising by the industry is down about 20%. So what you often see in times of dislocation like this, yes, lower overall fundraising volumes and market share shifts to stronger players. Transaction volumes slow down for a period of time as we're seeing, but the new investment opportunities get much more interesting. So we feel good about our positioning with that backdrop. As it relates to our flagship funds, as we've been saying, we are going to keep them open through the middle of next year. I think the fourth quarter of this year, as I mentioned in my comments, will be particularly light for the whole industry because most LPs are done allocating capital for the year. So I think you'll see a slowdown in the fourth quarter and then kind of a consistent raising of capital by the stronger players during the course of the year next year.
Jon Winkelried, CEO
Yes. To add to Jack's comment, in terms of the fundraising environment, it's important to note that larger managers performing well are being positively selected in the market. We have been very disciplined about returning a significant amount of capital over the last couple of years, which puts us in a strong position for many LPs to recycle capital back to us. We feel good about our relative standing in the market from this perspective. On the organic growth side, you'll remember that during the IPO discussions, we emphasized our growth and success in innovating and developing new strategies. We raised substantial capital in recent years related to step-out strategies and identifying new sectors or themes in the market. We intend to continue focusing on this as a firm. I would highlight four areas we believe will contribute to our ongoing growth. First, as Jim will discuss later, we are seeing a significant influx of interesting opportunities in the climate sector, which is attracting substantial investment. We aim to expand our platform in this area, with more opportunities to share later. Recently, we announced the hiring of a new partner to lead our TPG Next initiative, which is designed to support and grow minority managers. We expect to announce a significant lead capital commitment with an LP partner soon, and we'll be moving quickly on that strategy. In GP solutions, Jack mentioned important closes with anchor LPs in both TGS and NewQuest. Given the current environment and developments in the secondary market related to GP capital, we are focused on continuing to grow this area, which we see as a significant opportunity that is currently undercapitalized. Finally, we are leveraging the strength of our real estate franchise and starting to raise capital for the real estate credit opportunities in the market. We have a publicly traded REIT and recently hired Doug Bouquard, a partner from Goldman Sachs, to lead our real estate credit initiatives. What was once an underwhelming opportunity has become compelling due to recent changes in the term structure, rates, and the broader real estate market. We are currently engaging with LP partners to form capital around that.
Operator, Operator
We will take our next question from Ken Worthington with JPMorgan.
Ken Worthington, Analyst
We're just ticking off the boxes here. Carry outlook. So clearly, you mentioned that we can see the challenging markets. You mentioned, and we knew this before, the front-end loading of realization in a number of your portfolios. Can you help us better frame the outlook for realization in carry generation for 2023? This is very market-dependent, but you have insights into your portfolios in terms of what is seasoning and what is not. I was hoping to just get a better view on the magnitude of a slowdown that we should expect for next year, given all the factors that you had sort of discussed during the call.
Jack Weingart, CFO
Ken, it's Jack. Thanks for joining and for your question. I want to reiterate that we are not going to forecast commercial real estate, and there's a reason for that. As investors, we carefully consider when and which companies to acquire while focusing on maximizing value for our limited partners and achieving the best returns possible. Therefore, we will be selective in our decision to sell online companies. Given current market conditions, it is not ideal to sell high-quality companies. Meanwhile, we are increasing our backlog of future promote, which has risen by 7% to $725 million this quarter. Historically, we have typically monetized about 30% to 35% of our balance over any 12-month period, which gives you a sense of our annual backlog promote. Looking ahead to next year, unless market conditions improve, we are likely to be underweight in selling compared to that average. Additionally, as I mentioned earlier, Wind River continues to represent more than $100 million of our remaining accrued but unrealized carry. We are aiming for a closing by the end of the year. I hope this clarification helps. We won’t specify a particular pre-exit amount for any future period because our priority is to sell assets at the right time.
Jon Winkelried, CEO
I think in this environment, it's particularly hard to predict. The timing of some of the monetizations is going to be obviously shifting around a bit. Remember that since 2020, we returned about just under $50 billion of capital to our LPs and have generated really strong DPI across our funds. So far this year, we delivered nearly $190 million of PRE to our shareholders. I understand how you'd like to think about the pace of monetizations based on averages. But in this environment, with what's happening in the markets with spiking inflation for the first time in 40 years, with the macro picture, I think it's going to be harder to predict with some level of averaging or precision. When we do have opportunities to monetize, what we're focused on is generating the returns that we need to generate for our investors, and that's our priority.
Operator, Operator
We will take our next question from Michael Cyprys with Morgan Stanley.
Michael Cyprys, Analyst
Wanted to come back to the topic around interest rates. Maybe you could just talk a little bit about how the higher interest rate environment is impacting your portfolio companies. What portion of their cap structure is floating rate versus more fixed and hedged? And then on the new investment side, can you talk about how you're adapting to the higher financing costs on new deals? Is the purchase price flexing enough to fully offset? Or what are some of the other pieces that may serve to offset partially? Do you anticipate refinancing at a lower cost at some point in the future? Just any color there around how the LDL model is flexing in this environment.
Todd Sisitsky, President
Thank you for the question. The markets today are indeed challenging and uncertain. However, we tend to prefer an environment where capital is scarce. As you've noted, this impacts transaction prices. Sometimes it takes time for sellers to adjust their expectations. We prefer situations where leverage is not readily available. Although it is harder to access large amounts of debt, large transactions have not typically been our focus. Our portfolio generally shows that we seldom utilize the full amount of leverage available to us, leading to net debt-to-EBITDA ratios around 3x. In our capital business, which operates at the high end, that ratio is about 5x, which is below the industry average. We aim for growth scenarios where we not only expand the businesses but also enhance the growth trajectory. A less leveraged capital structure allows us to do this effectively. It’s a good opportunity to further develop our themes, which often involve collaborating with strategic partners in lower-leverage settings. Over the past few years, we have successfully done this in various areas. We have acted as the lead arranger for $5 billion of debt for recently completed capital transactions, which gives us a strong competitive edge.
Jack Weingart, CFO
Regarding whether we build in assumed low refinancing costs in the future, we absolutely do not do that. The higher cost of financing has to be accounted for in our model. However, we love environments where the distribution of outcomes is more skewed to the positive. When debt financing costs are higher like this and more difficult to access, that's a better time to finance deals. You do have a positive skew to what happens when you can opportunistically refinance that debt.
Operator, Operator
We will take our next question from Glenn Schorr with Evercore.
Jon Winkelried, CEO
Operator, do you want to go to the next question?
Operator, Operator
Yes. We will take our next question from Brian McKenna with JMP Securities.
Brian McKenna, Analyst
Great. So it's good to see the $3.4 billion first close for the Asia fund. So can you talk about the level of demand for this product, specifically in the current market backdrop? And then related, what is the broader deployment opportunity like in the region today?
Jon Winkelried, CEO
Jim, do you want to comment?
James Coulter, Executive Chairman
Sure. There is, as I think the close shows, there remains to be strong interest in Asia. The only place I would say we would see weakness in Asia interest is in the U.S. So internationally, there is a very strong interest, particularly in Europe and in the Middle East. In the U.S., we're running into some questions as to global politics. Good thing about our Asia business is we have always been underweighted China and overweighed what we call the arc around China. We're seeing a relative increase of interest in that strategy. Around the world, you're seeing a strong bounce back in many of the economies outside of China post-COVID, particularly in Asia. So as investors are looking for growth, they're looking for growth in Asia like China, and that's what our product offers.
Operator, Operator
We will take our next question from Glenn Schorr with Evercore.
Glenn Schorr, Analyst
Do you hear me this time?
Jon Winkelried, CEO
Yes, Glenn. We got you.
Glenn Schorr, Analyst
I was intrigued by your remarks regarding the potential in real estate credit. Could you elaborate on how you assess the opportunity and what your expectations are? Is this interest arising from current limited partner engagement, and could you elaborate on the transition in the real estate sector regarding debt? Additionally, while discussing credit, am I overinterpreting the situation by thinking that perhaps we could assemble the platform one strategy incrementally, forming a team for the direct lending component? I'm interested in whether this has any broader implications for the overall credit strategy.
Jon Winkelried, CEO
Well, Glenn, to address your question, our approach to the real estate credit opportunity is largely separate from the broader corporate opportunity. This doesn’t mean we are less focused on corporate credit or that our goals have shifted. Regarding real estate, we've been evaluating and discussing credit opportunities for some time. We entered the REIT market early with TRTX and the commercial mortgage REIT. We explored building additional private capital pools around that, while also focusing on scaling our real estate team and identifying interesting opportunities to enhance our track record and industry presence, which we achieved on the equity side. Our performance has been strong, and we have a deep understanding of the market across various sectors. We have garnered considerable support from limited partners due to our knowledge of the space. We brought in Doug because we believed the opportunity would arise, and it has come quicker than anticipated. We are starting in the same way many credit businesses do, seeing a significant total return opportunity due to market dislocation, especially in sectors affected by changes in term structures. We are optimistic about a large, scalable opportunity over time and are beginning to engage with limited partners, finding it quite appealing.
Operator, Operator
We will take our next question from Brian Bedell with Deutsche Bank.
Brian Bedell, Analyst
Maybe just to focus on Rise Climate, and if you can update us on the deployment potential there given the Inflation Reduction Act, you talked about this on the last call as well. It looks like it's at least 1/3 deployed if we're looking at maybe a sort of a playbook of deployment, like, for example, for the Growth V fund where you're 2/3 deployed and expect to be back in the market in the middle of next year. Can you just characterize the deployment opportunities in Rise Climate in that context and whether you're potentially cycling through that even at an even faster pace and can be back in the market sometime in 2023 for the next vintage?
James Coulter, Executive Chairman
I was hoping for a question in this area. Amidst the complicated market backdrop that we are in, you're all experiencing one of the real bright spots across our dashboard is what's happening in the climate-related space. Whatever opportunities one thought were available going into this year have been substantially increased by three things. First, the IRA. If you look at that bill, it's announced as a $369 billion set of incentives. More carefully, those incentives are uncapped, and people think it might be as high as $800 billion or $1 trillion. Within our own portfolio, that dramatically changes. It's the positive expected cash flows from things we've already invested in. It's good news for what we have in the ground. It also dramatically opens up the number of projects and companies that will pass our very strict underwriting standards. The U.S. has opened up, and Europe has something called REPowerEU, a $300 billion set of incentives. The European energy prices have dramatically shifted the green premium to a green discount, meaning that green is now much cheaper. The third thing really is the weather has just been lousy during the year. This remains on everyone's mind. That being said, activity has picked up. I think there have not been many times in my career where I've seen such an imbalance between the amount of specialized capital needed and the amount of specialized capital that has been formed. You think about specialized capital in technology or oil and gas investment, and then in all the firms that you can name that have funds in that area that don't yet exist in climate. Given the acceleration, that's a huge opportunity for us. More capital will flow in. It always does. The head start and the deep knowledge needed to address these markets have been our focus for quite some time. Our investment pace is ahead of where we might have expected. We're pleased with that. You can see us targeting additional capital raises in '23 and '24.
Operator, Operator
We will take our next question from Adam Beatty with UBS.
Adam Beatty, Analyst
I wanted to ask about LP co-invest. And we've talked a lot about co-mingled fundraising and what have you. Just wondering about the level of activity that you're seeing there. One of the aspects of the business that you mentioned in the roadshow was that occasionally, on larger deals, TPG would either bring in co-invest or otherwise go outside the firm for capital. Just looking for an update there, kind of the level of interest and activity that you're seeing from LPs these days.
Jack Weingart, CFO
Adam, it's Jack. Thanks for the question. Generally speaking, co-investment opportunities and pursuing co-investments alongside the funds in which they invest remain a long-term strategy that's very important to our clients. We have been a very good partner to many of our LPs in generating co-investments for those who want to see those co-investments alongside our funds. You won't be surprised to hear that in a choppy market like this, where many investors are moving toward more of a risk-off mentality, combined with the budgetary constraints that we've talked about, LPs are facing and committing to funds, budgets for total investment opportunities in the near term are much lower than they were a year ago. But it remains an important topic, and we will continue to generate attractive co-investment opportunities for our LP investors.
Todd Sisitsky, President
It's Todd, just adding one comment. It's also a really valuable thing for us to have a sophisticated group of LPs that, in the right situation, particularly when we want to make an initial platform investment and have the opportunity to invest more in our platform companies in the spaces we've spent so many years studying.
Operator, Operator
We will take our next question from Gerry O'Hara with Jefferies.
Gerald O'Hara, Analyst
Great. I guess my questions are on FRE or I suppose more specifically FRE earning margin. Jack, I appreciate the comments on how you're tracking ahead of target. But I'm curious to get your sense of how we should think about balancing the fee-paying AUM potential that you outlined earlier in the call against a possible investment in the business or probable, I suppose, investment in the business. So put another way, what would you perhaps see that could slow the trajectory? Or should we really think about it kind of building from here?
Jack Weingart, CFO
Yes. Thanks, Gerry. Good question. I would say we had more acceleration in our FRE margin this year than we expected really driven by both factors: faster growth, a faster success on the fundraising side driving higher fee-related revenue growth than we anticipated coming into the year; and our expenses, particularly comp and benefits, tracking below what we expected. It's taken us longer to hire people for key roles than we had put into our budget. Those hires haven't changed at all. We do have continued investment in building our teams built into our expectations for next year. You should expect that line item to grow during the course of next year and probably slow the pace of growth. I'm not changing our target FRE margin by the end of next year. I think we'll likely exceed it, but there are additional costs that you should expect us to build into the business as we continue to support long-term growth.
Operator, Operator
We will take our next question from Luke Mason with BNP Paribas.
Luke Mason, Analyst
I think most have been asked. I just wanted to follow up on the organic growth opportunities. In this market, how do you think about organic growth versus doing something inorganic? Like on the corporate credit side, are there opportunities for team lift-outs just in this market where potentially activity is a bit slower? Could you maybe do team lift-outs from elsewhere? Just how you think about that.
Jon Winkelried, CEO
Well, I think from a growth perspective, organic growth and inorganic growth is not mutually exclusive for us. Organic growth has been a hallmark for us in terms of how we've grown our firm over time. You'll probably remember how we showed the evolution of the firm in terms of growing both the size of our funds as well as identifying new strategies, step-out strategies, adjacent strategies, and also identifying new important sectors in the market and being innovators like in climate as an example or in impact more broadly. I talked about some of the organic growth that we're focused on. Jim just mentioned it as it relates to climate. We're talking about some of the other strategies that we're continuing to focus on. That's not going to slow down for us. We're focused on creating interesting investment opportunities. These pools of capital allow us to be nimble, and they feed off of one another. That's a core part of how we invest, how we've grown our firm, and how we engage with our capital partners, with our LP partners. So that's going to be a core part of what we continue to do at TPG. On the inorganic side, we've talked before about as the markets continue to consolidate in our industry, particularly in a harder fundraising environment, where capital is more scarce, you see the larger firms or experienced firms doing better in that context create opportunities for team lift-outs or acquisition of businesses. But in our world, which is a human capital business, getting inorganic growth completed is also about bringing the right team and the right people on board, that you share common objectives, and knowing what you're buying. Corporate credit, as an example, is one area we are definitely focused on as a firm. But we're not in a hurry; we want to find the right partner. We're thinking about the growth of our firm longer term. That's how I'd characterize it for you.
Operator, Operator
We will take our final question from Rufus Hone with BMO Capital Markets.
Rufus Hone, Analyst
I appreciate the detail you provided on the fundraising pipeline. But could you update us on how you're thinking about addressing the retail opportunity and the potential for growth of permanent capital vehicles? Any detail there would be great.
Jon Winkelried, CEO
First of all, just to level set, we're engaged with the channel, particularly in the high-net-worth retail space, on virtually every campaign that we're in the market on. As we've said before, we feel like our business, our brand, and our product flow is something that the channel is very interested in. We have great partnerships in the channel partners, and we are in market trying to access capital in every one of our current campaigns. That said, the channel demand has been weaker as you might expect. It's a function of investors feeling risk-off or being more cautious as the markets have been volatile. Overall, I think we continue to be active in that higher net worth market; we'll continue to do so.
Operator, Operator
This concludes the Q&A portion of today's call. I would now like to turn the call back over to Gary Stein for any additional or closing remarks.
Gary Stein, Head of Investor Relations
Thank you, operator. Thanks, everyone, for joining us this morning. If you have any follow-up questions, please circle back to me or Ebony. Otherwise, we'll look forward to talking to you again next quarter. Thank you.
Jack Weingart, CFO
Thanks, everyone.
Jon Winkelried, CEO
Thank you.
Operator, Operator
This concludes TPG's Third Quarter 2022 Earnings Call and Webcast. You may now disconnect your line at this time, and have a wonderful day.