TPG Inc. quarterly report, Q3 FY2022

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TPG Inc. — Q3 2022 Form 10-Q

Business context and period. Unaudited results cover the quarter and nine months ended September 30, 2022. TPG is a global alternative asset manager, reporting one operating segment and $135.1 billion of AUM. The January 2022 reorganization and IPO changed the company’s structure, tax status, ownership, and compensation accounting; comparisons with 2021, when the predecessor was a private partnership, are therefore not fully like-for-like.

Key financial metrics

  • Q3 revenue: $561.1 million, up 10% from $511.3 million. Fees and other rose 19% to $333.5 million; capital allocation-based income was $227.6 million, down 2%.
  • Q3 earnings: Consolidated net income was $53.2 million, versus $520.5 million a year earlier. Net income attributable to TPG Inc. was $37.4 million. Class A EPS was $0.44 basic and $0.09 diluted.
  • Nine-month results: Revenue was $1.56 billion, down 60%; consolidated net loss was $46.5 million, while net income attributable to TPG Inc. was $68.8 million. Basic Class A EPS was $0.82; diluted EPS was a loss of $0.16. Prior-year results included unusually high performance allocations and investment-related gains.
  • Fee-related earnings (non-GAAP): Q3 FRE was $121.2 million, versus $86.9 million; FRE was approximately 43% of fee-related revenue of $282.3 million, compared with approximately 33% a year earlier (calculated from reported figures). Nine-month FRE was $315.0 million, versus $129.7 million.
  • Distributable earnings (non-GAAP): Q3 DE was $121.5 million, versus $635.3 million; nine-month DE was $508.7 million, versus $939.1 million. Lower realized performance allocations were the main drag. Nine-month after-tax DE was $473.7 million, versus $932.7 million.
  • Cash flow and liquidity: Nine-month operating cash flow was $788.6 million, versus $1.06 billion; investing used $2.9 million and financing used $705.8 million. At quarter-end, cash and cash equivalents were $1.05 billion, with $13.2 million restricted. Management reported total liquidity of $1.78 billion, including $730 million of undrawn credit capacity; it states $571.8 million of cash was attributable to the TPG Operating Group and securitization vehicles.
  • Debt and obligations: Debt carrying value was $444.4 million: $199.2 million of senior unsecured term debt and $245.2 million of securitized borrowings. The $700 million revolving facility and $30 million subordinated facility were undrawn at quarter-end. The term loan matures in December 2024; securitized notes mature in 2038. Operating lease liabilities had a $152.1 million present value.
  • Scale and fundraising: AUM increased from $113.6 billion at year-end 2021 to $135.1 billion; fee-earning AUM rose to $81.2 billion from $60.1 billion. Nine-month capital raised was $26.4 billion, available capital was $46.4 billion, and capital invested was $10.8 billion.

Material changes versus prior period

  • Q3 management fees grew 22%, supported by new fund activations and launches; nine-month management fees grew 31%. Q3 transaction, monitoring and other fees fell 57%, reflecting less Market Solutions capital-markets activity.
  • Nine-month performance allocations fell 79% to $635.8 million, and capital-interest income fell 80% to $31.3 million. TPG reported 7% portfolio appreciation for the nine months, compared with 32% in the prior-year period; Q3 portfolio appreciation was 2%.
  • Post-IPO equity-based compensation and performance-allocation compensation were significant new expense categories. These, alongside investment valuation losses, help explain why GAAP net income fell sharply despite growth in fee revenues.
  • Investments declined to $5.73 billion from $6.11 billion at year-end, primarily reflecting performance-allocation and investment losses. Nine-month investment-activity losses were $90.8 million, including losses associated with Vacasa and Nerdy.

Outlook, risks and unusual items

  • Management gave no specific numerical earnings or revenue guidance. It believes available liquidity is sufficient for projected operating and debt-service needs for at least 12 months, while noting additional capital could be needed.
  • Management cited persistent inflation, rising interest rates, slowing growth, geopolitical risks and market volatility. Fundraising, investment returns, realizations, deployment opportunities and valuations may be affected; private-asset valuations involve judgment and may differ from realized proceeds.
  • Potential clawback was $58.3 million net of tax if fund investments were liquidated at then-current fair values. The pre-tax amount subject to potential clawback would be $1.85 billion if all remaining investments became worthless, which management considers remote.
  • TPG reported $381.3 million of unfunded investment commitments and guarantees totaling about $1.10 billion, of which $324.8 million related to outstanding debt. Secured borrowings are limited to specified securitized assets; the company said it complied with related covenants.
  • TPGY redeemed all public shares on October 11, 2022 after failing to complete a business combination; its warrants expired without value. This occurred after quarter-end and affected the quarter-end classification of SPAC redeemable equity.
  • Legal matters include continuing litigation concerning the former Hellas investment. TPG said it believes the claims are without merit and does not expect pending proceedings to have a material impact, but acknowledges an adverse outcome could affect a particular period. In October 2022, it received an SEC document request concerning business-related electronic communications and said it would cooperate.
  • Subsequent to quarter-end, the board declared a $0.26-per-share Class A dividend, payable December 2, 2022. TPG also authorized a charter amendment intended to ensure free-float Class A shares hold at least 5.1% of aggregate voting power.

Important facts for investors to verify

  • How the post-IPO compensation structure, including equity and performance-allocation compensation, affects recurring earnings and distributable cash.
  • The composition and realization sensitivity of accrued performance allocations, fund valuations, and potential clawback exposures.
  • Whether fundraising and fee-earning AUM growth can offset lower transaction activity and slower realizations in a weaker market.
  • The availability of reported liquidity for the parent and operating group, distinguishing it from restricted cash, SPAC trust assets, and securitization-vehicle assets.
  • The effect of Class B’s ten votes per share, TPG’s minority economic ownership of the Operating Group, and the proposed voting-power charter amendment on public shareholders.
  • The status and potential financial impact of the Hellas litigation, SEC communications inquiry, and TPGY wind-down.