Earnings Call Transcript
TPG Inc. (TPG)
Earnings Call Transcript - TPG Q1 2023
Operator, Operator
Good morning, and welcome to the TPG Conference Call. Currently all callers have been placed in a listen-only mode and following management's prepared remarks, the call will be opened for your questions. Please be advised that today's call is being recorded. Please go to TPG's IR website to obtain earning 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, Ashley. Thank you all for joining us on our first quarter conference call. We're also excited to announce that we have entered into a definitive agreement to acquire Angelo Gordon and we will be discussing the transaction today in detail. Earlier this morning, in addition to posting our standard quarterly earnings materials to our Investor Relations website, we issued a press release announcing the acquisition and posted an investor presentation that we will be referring to during this call. With me this morning are Chief Executive Officer, Jon Winkelried, and our Chief Financial Officer, Jack Weingart. Our Executive Chairman and Co-Founder, Jim Coulter, and our President, Todd Sisitsky, will also be available for the Q&A portion of this call. Additionally, we are pleased to be joined this morning by Josh Baumgarten and Adam Schwartz, the Co-Chief Executive Officers of Angelo Gordon. 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 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 measures, non-GAAP measures, and pro-forma non-GAAP measures reflecting the reorganization that was completed during 2021 and immediately prior to TPG's IPO. We believe it's helpful for investors and analysts to understand the historic results through the lens of our go-forward structure and please refer to TPG's earnings release for details on the pro-forma financial information. We'll also 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 Funds. Looking briefly at our results for the first quarter, we reported GAAP net income attributable to TPG Inc. of $25 million and after-tax distributable earnings of $88 million, or $0.24 per share of Class A common stock. We also declared a dividend of $0.20 per share of Class A common stock, which will be paid on June 5th to holders of record as of May 25th. With that I will turn the call over to Jon.
Jon Winkelried, CEO
Thanks, Gary. Good morning, everyone. Earlier today, we made a very important announcement. TPG has agreed to acquire Angelo Gordon, a fully-integrated and scaled multi-strategy alternatives platform in credit and real estate with approximately $73 billion in AUM and $50 billion in fee-earning AUM at the end of 2022. This transaction is highly compelling and advances our position as a diversified global alternative asset manager. We've been focused on strategic diversification since our IPO and we believe Angelo Gordon places us in a strong position to continue delivering growth and scale. We have a lot to cover this morning, so Jack and I will briefly review our quarterly results before discussing the Angelo Gordon transaction in detail. During the quarter, the timing of fundraising and deal activity continued to be impacted by market volatility and increased macro uncertainty. However, we've navigated through similar dynamics in prior cycles and continue to feel very good about our long-term growth trajectory, particularly with the addition of Angelo Gordon. We raised $27 billion of capital over the last 12 months and $2 billion in the quarter in a challenging fundraising environment. The $27 billion represents a 9% increase over the last 12 months ending first quarter 2022, while fundraising in the industry was down 11% during the same period. We continue to engage in robust, high-quality conversations with clients around the world. Interest remains strong. The timelines for capital commitments across the industry have been elongated. Similar to what you've already heard from other alternative asset managers, we believe near-term fundraising will remain difficult for the industry and Jack will discuss what this means for our funds. We really don't know how long the remainder of our current flagship campaigns will last, but we'll make thoughtful decisions around the timing of our final closes. As discussed broadly across the industry, deal activity in the first quarter was slow. We deployed $2 billion in the first quarter and $14 billion over the last 12 months. However, we've recently seen a significant pickup in our deal pipelines and our investment committees are very active. TPG's long-term, patient, and sector-driven approach to investing is well-suited for this environment. We believe the intellectual capital and ecosystems we built around our core themes, along with $43 billion of dry powder, leave us well positioned to capitalize on unique deployment opportunities. This includes an increasing proportion of corporate carve-outs, big privates, our proprietary partnerships, and we recently signed a number of differentiated deals. At TPG Capital, we agreed to carve out Elite, a provider of financial and practice management solutions for leading law firms from Thomson Reuters Corporations. We also announced the acquisition of OneOncology in partnership with AmerisourceBergen. This is an example of a creative proprietary corporate partnership from our leading healthcare franchise and the transaction includes a unique structure with significant downside protection. In Capital Asia, we announced an investment in Manipal hospitals, the second-largest pan-Indian healthcare services platform out of our current fund after originally investing from TPG Capital Asia VI in 2015. This investment was done alongside the Company's Founder and Temasek, both of whom were eager to bring in TPG for the next leg of value creation, given our track record of driving significant growth over the last eight years. Our impact platform continues to deploy capital at a healthy pace. Rise Climate and the Rise Fund recently invested in Palmetto Clean Technology, a fast-growing rooftop solar platform in the US. Rise was also the lead investor in the latest round of funding for Ohmium, a leader in the development and implementation of hydrogen electrolyzer technology. Across our current funds, we feel very good about our solid portfolio construction in sectors where we have strong thematic conviction and deep expertise. Our portfolios continue to perform well, and in aggregate, they appreciated 3% in the first quarter and 4% over the last 12 months. On an LTM basis, aggregate portfolio company revenue growth across all our platforms was 25%. While low inflationary pressures persist, aggregate EBITDA margins have remained stable and our companies have been able to effectively manage pricing and costs. Realizations across our platforms were more than $2 billion in the first quarter and $13 billion over the last 12 months. Given the long-dated nature of our capital, we will be very targeted and deliberate around monetizing investments during this part of the cycle. We're prepared for this type of environment in our underwriting and believe now is an opportune time to continue building value and driving growth in our portfolio coverage. Now Jack will spend a few minutes on our financial results.
Jack Weingart, CFO
Thanks, Jon. Good morning, everyone. At the end of the first quarter, we had assets under management of $137 billion, which is up 14% year-over-year. This was driven by $27 billion of capital raised and value creation of $3 billion, partially offset by $13 billion of realizations during the last 12 months. Fee-earning AUM increased 23% year-over-year to $79 billion at the end of Q1. AUM subject to fee-earning growth totaled $13 billion. Before I walk through our financials, I want to call out a few quarter-specific factors that impacted our first-quarter results. First, the step-down of our predecessor Asia Funds, which resulted in a one-time step-down in management fees of approximately $9 million during the quarter. Second, an unusually light quarter in our Capital Markets business, resulting from the timing of our investment activity. As a reminder, in Q4 of last year, we highlighted that our transaction fees of $45 million were unusually high. We believe that the average of these two quarters, or approximately $20 million to $25 million represents a normalized quarter for our transaction fees. Non-core expenses totaled approximately $11 million, primarily related to diligence, legal, and accounting work in connection with our acquisition of Angelo Gordon. This resulted in a one-time reduction in our distributable earnings for the quarter, which is reflected in our realized investment income in other line item. The unusually low capital markets fees, plus the one-time M&A expenses, caused our distributable earnings to be approximately $30 million lower than they would have otherwise been during the quarter. That being said, first-quarter management fees of $248 million increased 22% compared to the year-ago quarter and were relatively unchanged from Q4 '22. This is due to the one-time step-down of the prior Capital Asia Fund that I just described. Total fee-related revenue was $265 million in Q1, a 10% increase year-over-year. While transaction and monitoring fees were late in the quarter, based on the robust transaction pipeline that Jon referenced, we expect capital markets revenue to pick back up to more normalized levels over the balance of the year as our pace of deployment increases. Fee-related earnings totaled $99 million in the first quarter, up 8% year-over-year. LTM FRE of $461 million notably grew 31% compared to the pro forma last 12 months ended Q1 '22. Our first-quarter FRE margin of 37% was impacted by lower capital markets revenue as well as the Asia step-down. Given the inherent fluctuations in capital markets activity quarter-to-quarter and the one-time nature of the step-down, we believe that our run-rate FRE margin is better represented by our margin over the last 12 months, which was 42%. This is in line with our full-year 2022 results and a 335 basis point improvement from the pro forma last 12 months ended Q1 '22. We continue to be very disciplined around cost management and are working toward our 45% FRE margin target, which we believe we remain on track to hit by year-end for TPG on a standalone basis. I'll touch more on the impact of the integration of Angelo Gordon to our FRE margin in a few minutes. We ended the first quarter with $709 million in net accrued performance allocations, which is a 10% increase from the fourth quarter of '22. After-tax distributable earnings for the first quarter were $88 million, or $0.24 per share of Class A common stock and $589 million over the last 12 months. We announced a quarterly cash dividend of $0.20 per share of Class A common stock, representing 85% of our after-tax distributable earnings. Moving onto an update on fundraising. We raised $2 billion in the first quarter, as Jon mentioned, and $27 billion over the last 12 months. Notably, in the first quarter, we completed the final close of our highly successful campaign for TTAD II, our technology adjacency fund. We raised an aggregate of $3.4 billion from TTAD II, more than doubling the size of the inaugural fund. We believe the strength of TPG's brand, client relationships, investment style, and returns continue to stand out among alternative asset managers. As Jon mentioned, we have strong ongoing engagement with both new and existing LPs. However, we set our original flagship fundraising targets under different market conditions. We still expect each fund to grow compared to its predecessor. But in aggregate, they may not grow as much as we previously expected. We've already been managing the business with this in mind as you can see from our cost discipline in the first quarter. To dimensionalize this for you, I would note the following. Across our flagship funds currently in market, TPG 9, Healthcare Partners 2, Asia 8, and Rise 3, our original targets totaled $27.5 billion. While it's too early to tell what the outcome of each fundraise will be, we're currently managing the business, assuming we'll raise an aggregate of approximately $23 billion to $24 billion, which would represent greater than 10% growth over the aggregate predecessor funds. This implies we would need to raise approximately an incremental $7 billion across these four funds. Based on our strong pipeline of LP engagement, we have confidence in our ability to achieve this outcome. Finally, we continue to make good progress capitalizing our new strategies including TPG Next, Life Sciences, and TRECO, our real estate credit funding, as well as preparing to launch our first climate infrastructure fund. We expect to have a further update on these organic initiatives in the coming quarters. Given the significant fundraising headwinds, I want to acknowledge the strong progress we've made in our campaigns and the considerable growth in our fee-earning AUM. We have a near-record level of dry powder available to invest in growing pipelines and increasingly interesting opportunities across our platforms. So there's a lot to look forward to. Now I'll turn the call back over to Jon to talk about the Angelo Gordon transaction in greater detail.
Jon Winkelried, CEO
Thanks, Jack. Since our IPO early last year, we've consistently signaled our desire to drive continued growth and diversification through both organic initiatives and strategic transactions. We always seek to build long-term shareholder value and have focused on scaling our existing platforms and providing a broader array of high-quality investment solutions to our clients. We believe the Angelo Gordon transaction delivers on these objectives. We've been seeking a platform that we believe will generate strong returns for our limited partners. Angelo Gordon has done that historically, as evidenced by their proven investment track record and their significant recent AUM growth. And we believe they are well-positioned to continue delivering attractive risk-adjusted returns going forward. Assuming TPG and Angelo Gordon had been combined at the end of 2022, we would have had approximately $208 billion of total AUM and $128 billion of fee-earning AUM with approximately 1,800 employees located in 18 cities around the world. We expect this transaction to be mid to high single-digit accretive on an FRE and after-tax DE per share basis in 2024 before any revenue or cost synergies. The acquisition of Angelo Gordon with its scale of credit and real estate businesses is directly on target with our strategic objectives to further diversify and unlock new avenues for growth and innovation in attractive and complementary asset classes. First, Angelo Gordon's $55 billion credit platform brings significant momentum to TPG in what is widely recognized as a multi-trillion dollar market opportunity in credit investing. This business has grown AUM at a 15% CAGR from 2017 to 2022. Importantly, this growth is diversified across four major scale strategies along the credit spectrum, including corporate credit and special situations, direct lending through their Twin Brook business, and structured credit. Angelo Gordon's credit platform is not concentrated within a single product but rather offers multiple compelling paths for growth as we look ahead. Second, Angelo Gordon's $18 billion real estate platform has also demonstrated strong momentum with AUM growing at a 14% CAGR over the last five years and is very complementary to our existing fast-growing platform. The combination with Angelo Gordon will expand our current real estate presence in Europe, open new geographies with their business in Asia, broaden our product set to include strategies such as net lease, and enhance our global sourcing capabilities. Combined, we will have meaningful scale with $38 billion collected real estate AUM as of the end of 2022. We believe this transaction offers multiple ways to accelerate growth. There are clear synergies with our core investment processes and deep combined sector knowledge. We also see numerous opportunities to expand our product set by offering joint new strategies to a much larger client base that has minimal overlap. In addition to attractive growth opportunities, this transaction significantly diversifies TPG. With Angelo Gordon, our strategies outside of private equity increase as a percentage of our total AUM by 30 percentage points from approximately 20% to half our total AUM. Our institutional client relationships will increase more than 60% from 550 to approximately 900, and we'll have the ability to offer them a broad range of products across 27 total strategies. From a cultural standpoint, we've been very focused and deliberate about identifying a firm with a culture and approach to doing business similar to ours. We first met the Angelo Gordon team over a year ago and since then, we have spent considerable amount of time building relationships and getting to know one another. What stood out from the beginning was the close and unique alignment of our two firms. Since our first meetings in early 2022, Angelo Gordon's sustained culture came through and was consistently reinforced in our regular interactions over the last year. The culture at Angelo Gordon is entrepreneurial, collaborative, nimble, and respectful. They approach business with high ethical standards and a strong commitment to ownership and accountability. We really enjoyed getting to know them and it's clear that Angelo Gordon's culture is strong and highly complementary to everything we do at TPG. We also share similar histories. TPG and Angelo Gordon were both founded more than 30 years ago and have evolved in similar ways, transitioning from founder-led businesses into leading next-generation firms. Both firms place a strong emphasis on business building and innovation, which is evidenced by the significant growth each of us has experienced in recent years. Between our two firms, we launched 13 new products over the last five years and we've already had extensive conversations about the many types of businesses and strategies we can create together. The Angelo Gordon partners joining us have been at the firm for an average of 13 years, and we admire the outstanding business they've built. Importantly, this transaction is structured to create long-term alignment between TPG and Angelo Gordon. Non-founding partners at Angelo Gordon will receive approximately 85% of their consideration in equity with multi-year vesting and lockup provisions. This ensures alignment between our respective teams that are coming together as one firm, as well as with our LPs and public shareholders over the long-term. Finally, we both have a deep bench with extremely talented and dedicated employees that we believe the combination will create exciting new opportunities for our combined team going forward. On slide seven of the investor presentation, you'll see an overview of their favorable long-term dynamics driving growth in credit investing. The markets have been experiencing multi-decade trends of non-bank lenders stepping in to fill the void created by the retrenchment of traditional lending sources. At the same time, the continued scaling of private equity has increased demand for flexible and alternative financing solutions, and following a prolonged period of low interest rates, which drove institutional investors to search for yield, alternative credit has become a core component of institutional portfolio allocations. As a result, credit has been growing at a steady pace, and this is projected to continue well into the future. Slide eight provides a high-level overview of Angelo Gordon. The firm was founded nearly 35 years ago, currently has more than 650 employees including 245 investment professionals located in 12 offices around the world. Angelo Gordon has built a scaled alternatives business with a broad-spectrum of investment strategies across both credit and real estate. Based on their strong investment track record and focus on innovation over the last five years, they have generated significant growth doubling AUM and fee AUM, $73 billion and $50 billion, respectively. Slide nine highlights the broad spectrum of alternative solutions we'll be able to provide to our clients following the combination of TPG and Angelo Gordon. As you can see in the chart on the left, the combined entity will have a much broader suite of investment strategies across a number of asset classes. In addition, the right slide shows that the transaction will substantially expand our offerings to target a wider range of risk and return profiles. On slide ten, we highlight the strategic rationale and benefits of this transaction. With a broader spectrum of investment strategies, we'll be even more compelling as a partner and solution provider for clients globally. Additionally, we will be able to offer customized multi-asset class solutions that include credit, real estate, and private equity. Looking at the client bases of TPG and Angelo Gordon, they are highly complementary. This provides us with a substantial opportunity to expand our respective relationships across a broader range of platforms and strategies. On the closing of this transaction, we expect to have more than 900 combined institutional LP relationships that will be well-diversified by both geography and channel, and there's minimal overlap between the two client bases. Only around 10% of our relationships are currently shared. The combined company will benefit from shared intellectual capital, including sector and investing expertise, broader deal sourcing, and the support of robust infrastructure. We expect this will drive enhanced opportunities for growth, business expansion, and product development. Through the broader-based clients and investment strategies, we believe the combined company will be well-positioned to expand our distribution capabilities in high-growth channels such as insurance, high-net worth, and retail. We're incredibly excited to bring our businesses together. I want to thank Josh and Adam and the broader teams at both TPG and Angelo Gordon who have put in countless hours over the last year to make this happen. Of course, there is still a tremendous amount of work in front of us to execute on what we've outlined here today. This has been an extraordinary team effort. I know I speak for the entire leadership team of both organizations and thank you for your partnership, execution, and continued focus. I'll turn the call over to Josh and Adam to make a few comments.
Josh Baumgarten, Co-CEO, Angelo Gordon
It's Jon. I'm very excited to finally get the opportunity to discuss the transaction with you all today. It's been a long year. Today marks a major milestone for Angelo Gordon. It's truly a testament to the team and the business we have built over our nearly 35 year history. I'm very excited to be speaking with you all this morning. I'm going to briefly discuss why this is the opportune time for a combination with TPG and why TPG is the ideal partner for us. As many people know, we're seeing a steady shift in the dynamics across our industry. Assets LP capital is more competitive today than ever before and many LPs want to build larger, strategic relationships with more established best-in-class managers who offer a diverse set of processes. There is no doubt today that there is a clear competitive advantage in scale and diversification. As a firm, we've reached an inflection point, where we're now routinely competing with some of the largest alternative managers in the world on a daily basis. We have big ambitions as the firm's talented professionals who are focused on delivering for our LP; smart and strategic growth is an absolute imperative. We have the brand, the people, and the solution set to continue to grow and drive performance for our clients. But at the same time, we've always had an eye towards strategic opportunities that would expand our capabilities and product offerings. Importantly, our firm is not for sale. However, given what we want to accomplish and after our meetings with our new partners at TPG, we recognize the opportunity and unique power of this combination. And we've had many decisions we made, we'd remain uncompromising on our deep commitment to a firm culture of collaboration and investment philosophy built on fundamental research and downside protection, and an unwavering focus on our clients. We believe the combination with TPG reflects all of these commitments and also delivers significant opportunities for all of our employees. I'm now going to turn the call to my partner, Adam Schwartz.
Adam Schwartz, Co-CEO, Angelo Gordon
Thanks, Josh. Good morning, everyone. So, we believe that this is a transaction that will strongly deliver benefits of scale, diversification, and opportunity for both firms. TPG will bring expanded investment capabilities, significant industry and domain expertise, and a broad and deep base of LPs, all of which we believe will help accelerate and expand the trajectory of Angelo Gordon. Consistent with Jon's comments, I want to reiterate that we are confident that the combination represents a strong strategic and cultural fit. When the transaction closes, TPG and Angelo Gordon will join to form a leading investment platform with a shared philosophy of firm culture, investment excellence, and delivering for clients. Importantly, our firms are entirely aligned on achieving growth through performance. Our investment teams will have the opportunity to leverage TPG's deep industry and sector expertise in areas such as healthcare, technology, Internet and digital media, consumer and business services. And the scale of the combined platform will enhance our access to capital, unlocking new opportunities to expand our deal pipelines and drive performance for our LPs. With the power of our combined platform, we will be able to pursue new solutions for our clients across the risk and return spectrum by leveraging our individual and collective investment capabilities and approaches. Ultimately, this transaction is about growth and capitalizing on our collective momentum in order to do more together. Our priority is focusing on execution to realize the opportunities that we are confident exist which ultimately will be a positive, as Josh said, for our people and our clients. Josh and I've spent a lot of time with Jon, Jack, Jim, Todd, Anilu, and many others at TPG over the last year. It's been a great team effort getting to this result today. We are very excited about this partnership and how our businesses fit together. We couldn't be more enthusiastic about joining together with them to drive growth and create significant long-term value. Jack will now walk through the transaction details and the financial benefits.
Jack Weingart, CFO
Thanks, Adam. As you can tell, we're all looking forward to working together as partners. I'll close out our prepared remarks by reviewing the financial impact of this transaction. We're acquiring Angelo Gordon in a cash and equity transaction valued at approximately $2.7 billion, based on TPG share price as of Friday. This includes approximately $970 million in cash and up to $62.5 million in common units and RSUs of TPG, which represents approximately 16% of the equity of the combined company. We believe the transaction has been well structured to ensure a clear alignment of interests. Angelo Gordon's active partners will generally receive 85% of their consideration in equity while the founders of Angelo Gordon will receive 90% of their consideration in cash and 10% in equity. The unvested common units and RSUs that the Angelo Gordon non-founder partners are receiving will generally vest ratably over a five-year period, with a full lock-up during the first year post-closing. Importantly, a portion of Angelo Gordon's equity consideration will be distributed to its employees, creating broad-based employee ownership. This is similar to the IPO award given to TPG employees when we went public, ensuring everyone who is a shareholder and directly benefits from the growth of the business. This transaction also includes post-closing contingent consideration, which is valued at up to $400 million. This earn-out is based on Angelo Gordon achieving certain fee-related revenue milestones in 2026, and if earned, will pay it out in 2027. In order to receive 100% of the earn-out, Angelo Gordon will need to grow its annual FRR by 16% per annum through 2026 and TPG will have the flexibility to determine the cash and equity mix used to fund any earn-out payment due. Consistent with our business model, the transaction then structures the 20% of performance allocations generated by Angelo Gordon funds to flow-through to TPG's operating group, with public shareholders receiving their customary proportion. Upon closing, Angelo Gordon will become a new significant investing platform within TPG. In terms of management, Angelo Gordon's Co-CEOs, Josh and Adam, will become co-managing partners of the platform, reporting directly to Jon. It's expected that Angelo Gordon's other executives and senior management will continue in their current roles upon the closing of the transaction. Finally, a senior Angelo Gordon partner will also join TPG's Board of Directors. Looking briefly at the pro forma financial impact, as Jon mentioned, we expect this transaction to be mid-to-high single-digit accretive to TPG's FRE and after-tax DE per share in 2024, and that's before any revenue or cost synergies that we may realize. We'll provide more specific financial disclosure around the time of close. But in the meantime, I wanted to provide the following framework. At the end of 2022, Angelo Gordon's fee-earning AUM was $50 billion. This FAUM has more than doubled over the past five years growing at a 17% CAGR. The average fee rate for 2022 was approximately 85 basis points to 90 basis points across all real estate and credit funds. Additionally, I would note that several of their core credit products pay fees on drawn capital only. Due to their strong recent fundraising momentum, Angelo Gordon had AUM not yet earning fees of approximately $11 billion at the end of 2022. As they invest this capital, it will flow into FAUM and begin paying management fees. Next, Angelo Gordon has been pursuing an expansion of their FRE margin much like TPG. Given the firm's recent growth and investment in their business, they're earlier in their execution in the process of realizing operating leverage and margin expansion. We expect Angelo Gordon's FRE margin on a standalone basis in 2023 to be in the mid to high 20s. Post-closing, we expect our combined FRE margins to blend down to the high 30s, creating an opportunity for us to resume our margin expansion, benefiting from operating leverage across a much larger base of fee-related revenue as we integrate and scale the businesses. Finally on PRE, as I mentioned, we're acquiring 20% of historical and go forward carried interest across Angelo Gordon funds and expect to flow this through to TPG shareholders. At the end of 2022, Angelo Gordon had accrued unrealized carried interest of approximately $760 million. So the 20% allocable to TPG shareholders was approximately $150 million. This will be additive to the current TPG balance of $709 million. In terms of funding the cash portion of the acquisition to close, we expect to use our current cash balance and undrawn revolver. Upon completion of the transaction, our leverage will remain conservative and we'll have ample liquidity and significant financial flexibility. Lastly, the transaction is subject to customary closing conditions including Hart-Scott-Rodino, international regulatory approvals, and other clients and third-party consents. The transaction was unanimously approved by TPG's Board of Directors and is expected to close in the fourth quarter of this year. Before I turn the call back over to the operator so we can take your questions, I'd like to echo Jon, Josh, and Adam's enthusiasm for this transaction and thank everyone at TPG and Angelo Gordon for helping us reach this milestone. We're ready to take questions.
Operator, Operator
Thank you. We will take our first question from Glenn Schorr with Evercore ISI. Please go ahead.
Glenn Schorr, Analyst
Hi, thanks very much.
Jon Winkelried, CEO
Hi Glenn.
Glenn Schorr, Analyst
Hello. So, I guess I'll go with, thank you for the FRE margin, but I'm getting hit up by some people asking what was FRE? What was DE? What multiple do you feel you're paying for this business you bought? I understand all the synergies. And then, maybe with a 90% cash payout for the founders, maybe talk about any lessons learned from the past experience with Sixth Street and how you went about this transaction and structuring it to keep both sides engaged? Thanks so much.
Jack Weingart, CFO
Yeah, I think, Glenn, the intent in providing the roadmap I did on financial information was to give people enough data to kind of calculate what they believe FRE is for the business. We're not disclosing an acquisition multiple, but hopefully, the framework helped. And I would add that we feel like we paid a fair value for the business and we feel good about the buy-in price.
Jon Winkelried, CEO
I think there are a few key aspects regarding the transaction structure and valuable lessons learned. Notably, Angelo Gordon is joining the firm as an additional significant platform. This means we continue to align with our established governance and control structures. When Sixth Street was part of our platform, it functioned more independently under our umbrella. This time, we are intentionally structuring it differently, and both we and Angelo Gordon are excited about this approach. Additionally, we've structured the compensation so that aside from the two founders, the estates of John Angelo and Michael Gordon, roughly 85% of the incoming team's compensation is in equity. My new partners can certainly express their eagerness to own stock, as well as that of their team.
Josh Baumgarten, Co-CEO, Angelo Gordon
Yeah, thank you. Yeah, for the non-founding partners, it was very critical in terms of the consideration mix to receive as much equity as they possibly could, for alignment reasons, but also we all want to contribute and participate alongside the combined growth that we expect to offer the TPG platform. So, equity as part of consideration was absolutely critical to all of us.
Adam Schwartz, Co-CEO, Angelo Gordon
And I would just add that the majority of the consideration is going to the non-founder partners. So the redeeming founders were a minority portion of the consideration.
Glenn Schorr, Analyst
I appreciate all that. Thanks.
Operator, Operator
And we will take our next question from Kenneth Worthington with JPMorgan. Please go ahead.
Alexander Bernstein, Analyst
Hi, this is Alex Bernstein on for Ken Worthington. Thanks for taking the question and congrats on the transaction. You mentioned the $55 billion in AUM for Angelo Gordon's credit business, can you give us any sort of rough break-out around the size of this perhaps CLO, direct lending, and structured credit businesses? And then maybe indirectly and specifically, just given the expected big opportunity set there in the market more broadly, can you talk about what proportion of that is sponsor and non-sponsor driven? Thanks so much.
Josh Baumgarten, Co-CEO, Angelo Gordon
Sure, I'm happy to grab that. So, the $55 billion in credit that's broken down broadly, I guess we think about as three significant sectors. About $22.5 million is going to be in corporate credit and multi-strategy. The two biggest components of that would be about $13 billion in our Credit Solutions business, about $8 billion in our performing loan or CLO business. And actually that, as you mentioned, in our lending business, Twin Brook about $18.5 billion in terms of AUM. And then lastly, from our structured credit business about $14.2 billion. To your second question on the lending Twin Brook and all of its AUM, it's 100% sponsor-backed. So we are serving borrowers in the lower-middle market generally, sub $25 million EBITDA. But all will be sponsor-backed opportunities.
Jack Weingart, CFO
I would say, it's Jack, we agree with your comment that there's a real significant opportunity in direct lending area. For those of you who know the Twin Brook brand, it's an excellent, excellent business, focused very sharply on the lower-middle market space as Josh mentioned, lending to companies with below $25 million of EBITDA and we see a real opportunity to scale the business into larger company lending.
Craig Siegenthaler, Analyst
Hey, it's Craig Siegenthaler. Good morning, Jon, Jack. Hope everyone's doing well and congrats on finding your credit manager.
Jon Winkelried, CEO
Thank you.
Craig Siegenthaler, Analyst
So, my first one is on your existing portfolios, especially in the capital business. We all know the economic backdrop is getting a little more challenged. It's also not surprising to see that we're starting to see some defaults emerge across private markets. I wonder how you think about it? Are you expecting to see a larger number of defaults if the economy deteriorates into the second half? And as you construct your portfolios, we have 15 or 20 portfolio companies per fund. How do you plan for defaults in funds, and is it common to have one or two in a fund, which of course would be offset by multiple stronger performing investments?
Jon Winkelried, CEO
I think Todd is going to give you some color on that.
Todd Sisitsky, President
Thanks, Craig. I appreciate your observation regarding the mixed signals in the economy, and we're dedicating considerable effort to analyzing both results and leading indicators for companies. Thus far, we're pleased with the performance of our portfolio in the US, particularly on the private equity side. If we examine our private capital platforms, such as Asia, growth, and impact, we're seeing an average last twelve months growth in the mid-20% range, which is probably on the higher end given that most of our companies are well-established. This really highlights our strategy, which is very sector-focused. We invest a lot of time looking ahead to ensure we are in the right sectors and actively seek unique proprietary opportunities as discussed earlier in the call. Although we remain cautious about the overall market environment, we believe our positioning and the strong convictions we've built over years through studying sectors and forming relationships with CEOs serve us well. Regarding your second question, in our primary investment areas, which constitute the bulk of our private equity activities, we view it as a portfolio but concentrate on companies and sectors where we hold strong beliefs. We avoid pursuing risky long shots that may default; our aim is for all our companies to thrive. While some will inevitably underperform, as is typical in any portfolio, we are not in the business of relying on a few successes to balance out others that lag. Our goal is to generate solid risk-adjusted returns across our portfolio in sectors where we have substantial conviction. As Jon mentioned, despite the volatile market, we observed a nice uptick in valuations this quarter, reflecting the strong underlying growth within the portfolio, even during challenging times.
Jon Winkelried, CEO
I would just like to add that the reason our two new partners are here with us is because in this upcoming cycle, regardless of whether we experience a recession or not, the current environment is significantly different from the previous reset cycle. Interest rates are considerably higher now, and the term structure has changed compared to the last financial crisis when rates were essentially near zero and refinancing pressures were distinct. We are in a new environment that presents many opportunities. We need to manage our private equity portfolios as Todd mentioned, and that remains central to our business. However, we also see a substantial amount of opportunity, whether it's prompted by defaults or due to capital structure adjustments or refinancing. We expect to encounter numerous interesting opportunities across various capital structures. The Angelo Gordon team will clearly provide a strong strategic fit for capitalizing on those opportunities.
Craig Siegenthaler, Analyst
Jon, Todd. Thank you.
Jon Winkelried, CEO
Thank you.
Operator, Operator
And we will take our next question from Brian Bedell with Deutsche Bank. Please go ahead.
Brian Bedell, Analyst
Hello, good morning, and congratulations on the acquisition. I have a two-part question regarding the closing approvals for international markets. Could you specify which markets and regulators are involved? Additionally, when considering the FRE margin profile, which excludes synergies as you mentioned, how do you plan to align the FRE margin between the AG platform and TPG? Are there straightforward structural changes that can be made to improve that margin, or is it more of a long-term endeavor?
Jon Winkelried, CEO
Let me start with the FRE margin. Angelo Gordon has been expanding their FRE, and on its own, would have experienced continued operating leverage as they scale their various businesses. They are still in the early stages of that process, currently in the high 20s. We view this as a significant opportunity, and you've seen our commitment to expanding our FRE margin to a target of around 45%. We believe that collectively, over the coming years, we can achieve a higher margin than we would individually, thanks to a larger platform that will scale over time. We're not setting a specific target date for the FRE margin until we progress further with the business integration, but we genuinely see a real opportunity here. This isn't a transaction focused on immediate cost reductions. Instead, we anticipate growth potential from joining our businesses and achieving faster growth, along with operating leverage. We'll certainly find some costs to optimize, but our focus is more on accelerating growth. Brad, can you address the regulatory question?
Bradford Berenson, General Counsel
Yeah, I'm happy to Jon. There are a number of foreign regulators from whom we will need to seek approval. We're not anticipating any difficulties or unusual problems with any of them. The one that we expect will take the longest, just based on how transactions are being processed around the world right now, is the FCA in the UK, but there are several others given the global nature of our business and Angelo Gordon's business.
Brian Bedell, Analyst
Okay, it's great. That's helpful. That's helpful.
Jon Winkelried, CEO
Thanks Brian.
Operator, Operator
And we will take our next question from Michael Cyprys with Morgan Stanley. Please go ahead.
Michael Cyprys, Analyst
Hey, good morning. Congratulations on the deal and thanks for taking the question. Just with Josh and Adam on the line, I was just curious if they wouldn't mind sharing their perspective on what they see as most differentiated with Angelo Gordon in the marketplace versus others, and if they could maybe also elaborate on the approach to sourcing of investments that they take on the credit side? Thank you.
Josh Baumgarten, Co-CEO, Angelo Gordon
I'll start on the credit side and then particularly the last question. From a sourcing perspective, we've taken a very deliberate pivot from our brand over the past couple of years. Traditionally, people knew us as a sharp distressed investor. We have since pivoted to more of a partnership approach, but we are doing our best to actively work alongside private equity sponsors and asset owners to solve their capital needs, and what we've seen in particular over the past two to three years is an explosion in terms of origination as a result. People want to come to us because they know we are trying to work with them across all of our different business lines. And I would say, as Jon mentioned earlier, from an opportunity set perspective, while we're not seeing much in the way of stress in our portfolio, frankly in the markets, what we are seeing is a significant increase in terms of origination opportunity that is significantly greater than our capital base today, and that's one of the things we're so excited about partnering with TPG is working with them to create new solutions for all the opportunities we're seeing. But I would say this partnership approach has yielded massive improvements in terms of our sourcing.
Jon Winkelried, CEO
Let me add to that. When we first started working with our new partners at Angelo Gordon, one of our key focuses was their approach to the credit markets, which they tackle through a variety of strategies. They have direct lending, opportunistic investments, and structured credit, among others. As we became more familiar with their platform, it reminded us of our own strategy in private equity, where we've diversified our investments without being limited to a single fund or its size. This strategy enables us to be agile in raising capital and pursuing market opportunities, especially considering the uncertainty about where opportunities will arise. What stands out about the Angelo Gordon platform, compared to others we evaluated, is that it doesn't just concentrate on one segment, like direct lending, but instead explores a wide range of opportunities. Over time, as their platform has evolved, they have made significant investments in their business, similar to our efforts during our IPO, which may impact margins initially. However, once we optimize the combined platform, we are confident we will accelerate growth.
Michael Cyprys, Analyst
Great. Thank you.
Jon Winkelried, CEO
Thank you.
Operator, Operator
And we will take our next question from Finian O'Shea with Wells Fargo Securities. Please go ahead.
Finian O'Shea, Analyst
Hey everyone. Good morning and congratulations as well. Can you touch on what Angelo Gordon brings in terms of the retail channel for fundraising? And then also, Jack you mentioned that you would work to grow Twin Brook from its lower-middle market orientation to large market. How quickly can that happen? Is that immediate or sort of a multi-year journey? Thank you.
Jack Weingart, CFO
Hey, Finian, thanks. Look, do you want to talk about the retail first?
Josh Baumgarten, Co-CEO, Angelo Gordon
Yeah. Sure, just briefly. Yeah. On the retail side or retail and intermediary distribution side, it's been a key area of focus for us. We have significant retail exposure in a number of our open-end funds and more recently, have been increasing our closed-end fund structures. It's actually one of the areas that I think, from a client side perspective that both ourselves and TPG highlighted, a real need to lean in there and get more exposure to that channel. I think when we're working our math together very early on.
Adam Schwartz, Co-CEO, Angelo Gordon
The combination of our brands and our ability to deliver products to our retail channel partners has been significantly improved by this transaction. We are already consistently distributing our private equity products through our channel partners in every capital raise we undertake. Currently, we lack more yield-oriented products, but we recognize the interest in our floating-rate interest-rate exposure from the loan business. We believe this will enhance our role as a channel partner, and we are excited to expand this part of our platform.
Jack Weingart, CFO
Yeah. Well, I would say, since we've been working together for a year now, trying to create this partnership, we've already been talking to each other about new products and new structures to create to be attractive to the channel. So we expect to begin that work relatively quickly. I'd say more broadly on the fundraising side, this has been alluded to, but when you think about the institutional mix, Angelo Gordon's current mix is almost 80% Americas across their businesses and a little over 20% international. As you all know, from the time we spent together, we've built a very significant LTE presence in some of the bigger areas internationally with growing AUM and we think there's a real opportunity given the lack of overlap with our LPs to expand faster together on the institutional side as well as the retail side. On your direct lending question, like as I mentioned, Twin Brook is very focused on the lower-middle market, they've become really differentiated in that area. I think to accomplish a scaling of that business, it's going to take a little time. We're going to have to raise additional pools of capital focused on other segments of the market, but we strongly believe that Angelo Gordon has got the credit infrastructure to support that build-out.
Jon Winkelried, CEO
Even on the basis of the business now, by the way, I mean if you look at obviously I don't have to tell anybody about what's going on in the regional bank world and the contraction of credit that's continuing. I mean it's really this year unfortunately, sort of has shifted into another gear in terms of the contraction of credit, the provision of credit from the traditional banking channels, and that's going be accentuated as a result of the regional banking crisis, that's going to be accentuated for the mid-market to lower-middle market. So, there's just a very large opportunity period for an established brand like Twin Brook in the lending markets. So we intend to be the beneficiaries of that.
Josh Baumgarten, Co-CEO, Angelo Gordon
To highlight the responses from a broader retail investor base in Twin Brook, we are looking to diversify our capital structure. While we may pursue our traditional next series fund, we are also raising B, Cs, and evergreen capital pools. This is in response to the demand for ongoing permanent capital vehicles from this investor channel, where we have already seen significant success.
Operator, Operator
And we will take our next question from Bill Katz with Credit Suisse. Please go ahead.
William Katz, Analyst
Okay, thank you very much for taking the question and congrats as well on the transaction. Just coming back to the opportunity to grow the franchise. I think in your supplement, you talked about high net worth retail and insurance. I was wondering if you can maybe prioritize where you might see the growth first? And then one for Jack just as you think about on the other side of the transaction, what kind of leverage are you comfortable running the franchise at and how would you think about maybe negating some of the stock dilution from the share issuance? Thank you.
Jon Winkelried, CEO
I would like to discuss the potential for additional growth and diversification in capital sourcing. We've previously mentioned our franchise's ability to penetrate the retail and insurance markets. One reason for our focus on introducing new products and capabilities is the need to enhance our offerings to service the insurance market effectively. The current landscape in the insurance industry requires us to support various players in funding liabilities, which involves a combination of products ranging from traditional fixed-income options to more specialized private debt and higher-return private equity opportunities. This allows us to provide a diverse array of products and tailor solutions for our insurance partners, and following this transaction, we are in a significantly better position to do so. Even before this transaction, we were approached by several insurance companies that consider TPG an appealing partner due to our reputation, history, and global brand. This opens up new possibilities for us. Regarding the retail market, our product mix has traditionally catered to high-net-worth individuals but has not fully addressed the mass-affluent segment. This shift will be transformative in enhancing our ability to serve that channel with a new range of products. Additionally, we are eager to integrate our capabilities with areas like debt origination. There is a growing interest in sectors such as impact and climate within the retail market, and we position ourselves as leaders in those areas. This development provides us with various new tools to expand into that market with a distinctive product offering.
Jack Weingart, CFO
Regarding your question about the balance sheet, we planned for significant flexibility at our IPO. As I noted at the end of the quarter, we had just over $600 million in cash. This transaction will use about $450 million of that, bringing our cash level down to a more normalized range of $150 million to $200 million for flexibility. We will also utilize our $700 million revolving credit facility. We believe this transaction represents a step towards a more efficient balance sheet and makes effective use of the capacity established at our IPO. After this, our leverage will remain relatively modest, around 1.5 times when considering the revolver and our existing leverage. Post-transaction, we will continue to hold significant flexibility. We do not plan to repurchase stock in the near term to counter dilution; instead, we aim to increase our float. As we mentioned, we will issue only about 16% of the pro-forma share base, and over time, we will explore how to leverage our balance sheet for growth.
William Katz, Analyst
Thank you.
Operator, Operator
And we will take our next question from Adam Beatty with UBS. Please go ahead.
Adam Beatty, Analyst
Thank you and congratulations. I would like to inquire about revenue synergies, especially in the historically robust sectors for TPG private equity and growth-oriented investing. I appreciate the minimal overlap with Angelo Gordon's current limited partners and would like to know your thoughts on potentially capturing some additional share in that area. How do you plan to approach this incremental opportunity? Additionally, considering you still have some flagship funds in the market, do you anticipate any participation from Angelo Gordon's limited partners in your fundraising efforts this year? Thank you.
Jon Winkelried, CEO
Thank you for the question. Yes, I believe that when we partnered with our new associates, it was interesting and somewhat surprising to find that there is minimal overlap between our LP bases. This presents a significant opportunity for us to introduce each other to valuable relationships. Prior to this announcement, we were frequently asked during our earnings calls about our strategy to diversify our product offerings. Since going public, many of our LPs have inquired about our approach to this segment of the market. We value our partnerships with LPs deeply, and our main goal is to be as strategic a partner as possible by offering them a variety of products and return streams. In the current market, there has been a trend of larger asset management firms consolidating capital. We actively engage with our LPs across various strategies and partnerships. The addition of Angelo Gordon’s expertise in credit and real estate enhances our capabilities significantly. Many of our LP partners are eager to meet our new partners and explore collaboration opportunities once this partnership is solidified. This represents a substantial opportunity for us. Our combined capital formation teams significantly strengthen our capabilities. We have been investing in our capital formation and fundraising skills, and this alliance more than doubles the size of our team while bringing in new expertise and product knowledge that we previously lacked. Therefore, there are many opportunities for collaboration that we believe will have a positive impact on our growth.
Jim Coulter, Executive Chairman
This is Jim Coulter. I'd say, we've already, this morning, been in contact with trillions of dollars of capital in our partner group to let them know about this, and it was very well received. I would note that we have a history of successfully introducing our LP base to credit platforms in a way that has been highly accretive.
Adam Beatty, Analyst
Jon and Jim, thanks very much. Appreciate it.
Operator, Operator
And we will take our next question from Brian McKenna from JMP Securities. Please go ahead.
Brian McKenna, Analyst
Thanks. Good morning all and congrats on the deal. So, it's clearly been a tough backdrop for fundraising, specifically in private equity. But could you talk about fundraising trends at Angelo Gordon over the past year or so? And then I'm assuming more parts of this business raise capital on a more recurring basis given the mix of AUM. So how should we think about the cadence and consistency of fundraising on a pro-forma basis at TPG longer-term?
Josh Baumgarten, Co-CEO, Angelo Gordon
Sure. I'll start on the credit side. We've actually had really, really solid momentum over the past couple of years. There were about 1,500 new LPs at the firm over the past five years. As it relates to credit specifically, on corporate credit, we successfully raised two vehicles throughout 2022, both of which closed above our target return expectations. We deployed a good amount of capital, but we have significant dry powder there to be prepared to invest in what we think will probably be the next and probably the largest opportunity set in our careers in the credit market going forward. Twin Brook middle market lending, as I mentioned earlier, we're in the market now for our traditional series of funds. And as announced, also as mentioned, we're changing the capital structure of that business to obviously raise more permanent capital. Permanent capital at Angelo Gordon is $5 billion, $5.5 billion right now. It's something that our investors have been demanding. We expect it to be significantly greater as a proportion of our capital base going forward. But right now, we have very solid momentum across our middle-market lending franchise. And then you're going to structured credit, when people talk about private credit. It's interesting, you're talking a lot more about corporate middle-market lending, but structured credit is everything in our world that touches the consumer in all different forms and I would pass it over the next five, 10 years, it will be at least as big as what people refer to as the current private credit market; it's at the most nascent stage right now, we've been in that market for well over a decade. So we expect that we are just scratching the surface and in particular, what happened in March. Banks are exiting this market or changing their cost in this market faster by the day, we expect that to continue and we think we're going to be a significant leader and beneficiary there. So we're just scratching the surface in terms of structured credit and specialty finance. It's a multi-trillion dollar opportunity and again, we're one of the few who has been there for well over a decade.
Adam Schwartz, Co-CEO, Angelo Gordon
Real estate side I'll echo the sentiment we're seeing very good support from investors or excited about this vintage for the real-estate opportunity as we're all seeing day to day in the news and so without being able to comment specifically on funds that are in the market, because we are actually in the market on all of our real estate products, we are seeing strong response.
Jack Weingart, CFO
Yeah, Brian, I would say, more generally, as Jon mentioned, one of the things we find attractive about Angelo Gordon is their diverse range of products across credit real estate. Many monoline credit firms have faced challenges due to their focus on a single category and would have posed a greater risk if we had chosen that path. In contrast, Angelo Gordon has multiple well-positioned strategies across various credit segments, making them less dependent on a singular fundraising cycle. This diversification significantly mitigates our exposure to individual fundraising cycles. Regarding the continuous nature of fundraising, as Josh has pointed out, Angelo Gordon is still in the early stages of building the structures necessary for more constant fundraising, but this presents a significant growth opportunity for us together.
Brian McKenna, Analyst
Got it. Super helpful. Thank you.
Jack Weingart, CFO
Thanks.
Operator, Operator
And we will go next to Luke Mason with BNP Paribas. Please go ahead.
Luke Mason, Analyst
Yeah, good morning, and thanks for taking my question. It's just around the fundraising targets and I appreciate the much more challenging environment. I'm just wondering if you had any specifically on funds and more challenged within the flagships. And then, as it relates to the impact platform.
Jon Winkelried, CEO
Luke, we can't, sorry, we can't hear you. You're coming through. I think he was asking about quite muffled differentiated among the flagships in terms of you know what's easier or harder to get raised. I think that was the question.
Luke Mason, Analyst
Yeah, that was the question. Thanks.
Jon Winkelried, CEO
Luke, despite the challenging environment, we're seeing similar progress across all of our flagship funds. Each of them has solid investment performance supporting their fundraising efforts, and they are all making advances toward their targets. I wouldn't say any are significantly underperforming; they are all performing well given the tough conditions. However, we believe it is wise to plan for slightly smaller fund sizes as we consider our cost structure, and as I mentioned earlier, we still anticipate growth compared to the previous fund in each business.
Brian McKenna, Analyst
Thank you.
Operator, Operator
And this concludes the Q&A portion of today's call. I would now like to turn the call back over to Gary Stein for additional or closing remarks.
Gary Stein, Head of Investor Relations
Great. Thanks, operator. Thanks, everyone, for joining us this morning. Please feel free to follow-up with me or Abenie if you have any questions.
Operator, Operator
Thank you. And this concludes today's TPG conference call and webcast. You may now disconnect your line at this time and have a wonderful day.