TPG offers sweeteners for extension

TPG has received approval for more time to deploy its sixth fund, in part by offering to use 100% of transaction fees on deals done during the extension period to offset the management fee.

TPG has now received the consent it needed to extend the investment period on its $19 billion sixth fund by one year to February 2015, according to sources with knowledge of the situation. 

Sister title Private Equity International exclusively revealed last month that TPG was asking limited partners in Fund VI for more time to deploy remaining capital in the vehicle, which one LP said was somewhere between $3 billion and $4 billion. TPG needed approval from at least two-thirds of the limited partners in Fund VI by Friday, and has already reached that threshold, sources said.

The firm declined to comment.

As part of the extension agreement, TPG will only be charging management fees on invested capital, rather than committed capital, during the extension period, which is a fairly standard term for investment period extensions. 

However, the firm added an additional sweetener to further incentivize LPs to approve the extension. TPG will offset the management fee with 100 percent of any transaction fees on deals done during the extension period, according to LPs familiar with the situation. Fund VI’s original transaction fee offset was 65 percent.

We do expect to see more extensions come through, but I expect that the phenomenon will die out with the 2008 vintage year funds, as investing has increased dramatically for funds raised in 2009 and forward

The 100 percent offset does not affect fees on existing portfolio companies, and would not affect fees on companies acquired before the extension period begins in February, sources said. 

LPs interviewed by PEI supported the extension request. “It’s the right thing for investors, it’s the right thing for the firm, it gives them another year to put some capital to work,” one TPG investor told PEI in July. 

The feeling among LPs interviewed was that with the extension, TPG would put off launching its seventh fund until next year. Some media reports in 2012 speculated the firm would launch its seventh fund in 2013 with a target range from $8 billion to $12 billion.

TPG’s sixth fund is far from alone in needing more time to deploy capital; more than 87 percent of investor participants said they had received extension requests by the end of 2011, according to an LP sentiment survey by Coller Capital. 

While it’s not clear exactly why TPG couldn’t get the fund deployed during the investment period, many firms slowed

David
Bonderman

their pace of activity amid the global financial crisis. Deal flow was reduced to a trickle after the collapse of Lehman Brothers in 2008 and didn’t pick up again until the latter half of 2009 and into 2010 – and even then, larger transactions remained rare. 

Last year, The Carlyle Group won an investment period extension for its third Europe Partners fund, which closed on €5.3 billion in 2007. Carlyle got approval from LPs for a one-year extension from December 2012 to December 2013 to deploy about 20 percent of capital remaining in the vehicle. In exchange, Carlyle reduced the management fee and agreed to not charge a fee on investments made during the extension period. 

TPG VI could be one of the last of the major funds raised during the boom-era to need an investment period extension, sources told PEI in prior interviews. 

“We do expect to see more extensions come through, but I expect that the phenomenon will die out with the 2008 vintage year funds, as investing has increased dramatically for funds raised in 2009 and forward,” according to Jamie Ebersole, managing director with SL Capital Partners.