TPG takes on property

Following in the footsteps of a long line of mega-firms, TPG is dipping a toe into real estate. But is it motivated more by opportunity or the need to deploy capital?

Over the years, several large private equity firms, such as The Blackstone Group and Warburg Pincus, have been unable to resist the lure of real estate.

Last October TPG Capital gave the first indication it was following in their footsteps when it teamed up with Starwood Capital Group, Perry Capital and WLR LeFrak to buy $4.5 billion of US real estate construction development loans provided by Corus Bank from the Federal Deposit Insurance Corporation (FDIC).

David Bonderman

So far this year, the firm has followed this by unveiling a $750 million property joint venture with Los Angeles-based real estate developer Rick Caruso targeting underperforming retail centres on the West coast of America, and a €900 million joint venture with Ireland’s Green Property to acquire assets in the UK and Ireland.

TPG declined to comment on its real estate plans.  According to a source, the deal with Starwood was funded by both TPG Partners V and VI, while the equity for the partnerships with Caruso is coming out of TPG VI alone. In other words, the firm is deploying LP equity out of its large mainstream private equity funds, and then marrying this equity up with that of expert real estate investment firms and operators to buy assets.

For this reason, TPG’s move into real estate has led some cynics to wonder whether this is less of a well-crafted visionary move into a new asset class than a way to blast through $1 billion of equity. TPG VI raised a monster $18.8 billion in 2008, but slow deal activity led the firm to voluntarily cut the size of its fund by a reported $1 billion at the end of 2008. In 2009, it then told investors it would refund $20 million of fees as part of that reduction.

But even if the move into real estate had been prompted by a need to deploy capital, does it really matter?

“Cynics might say this is indicative of the fact that there’s not a lot of opportunity to put an $18 billion fund to work, but if you look at the details, it shouldn’t seem so troubling to investors,” says one former TPG employee.

He argues that while TPG does not have a big experienced real estate team as such, it does have senior deal guys – co-founders David Bonderman and James Coulter included – that are steeped in distressed investing experience.

Also, the firm is used to buying operating companies backed by a high degree of real estate assets. For example, it acquired British department store Debenhams alongside CVC Capital Partners for £1.7 billion in 2003 and subsequently sold and leased back those stores to refinance the deal. Myer, the Australian department store chain, and Harrah’s Entertainment are further examples of real estate-intensive portfolio companies that TPG has acquired.  

And while many private equity fund agreements limit the sponsor’s ability to invest in real estate, TPG VI is under no such restriction. 

Rather than focus on the pressure TPG faces to deploy capital, an alternate perspective on its move into real estate could be offered by referring to a comment made by an associate of Bonderman in the Dallas Morning News in 1996: “Texas Pacific likes to target industries going through some sort of transition: changes going on within the industry, pressure from the outside. The theory is that a dynamic industry allows for the most dynamic investments.” Fourteen years after that article was written, it could well be describing real estate.  


Private equity firms have chosen various ways of entering into real estate with varying outcomes. Here is a snapshot of some of the better known platforms

Blackstone’s real estate platform is the largest private equity real estate firm in the world on the basis of how much equity it has raised in the last 5 years: $23 billion. It broke records for the largest ever private equity deal – let alone private equity real estate deal – when it bought Equity Office Properties for $39 billion in 2006.

The New York based firm has tried it both ways. It first started investing in real estate out of its main private equity fund. Then it decided to raise a dedicated real estate fund, Warburg Pincus Real Estate I, which raised $1.2 billion in 2006. The firm subsequently decided to invest in property from its private equity funds again although it is still managing the real estate offering.

This titan of buyout firms has tried to hire a real estate team and has sporadically invested in property out of its private equity vehicles.

Apollo Management is the best known example in recent times of a private equity firm launching a full blooded move into real estate or make that re-launch into real estate. After all, Apollo’s Leon Black established Apollo Real Estate Advisors in the early 1990s.

In Europe, this firm is probably the best example of a private equity firm with a real estate platform. Its most recent offering, Doughty Hanson & Co European Real Estate II, closed in 2006 on €560 million of commitments.

Bain Capital, the Boston-based private equity firm co-founded in 1984 by Mitt Romney, the Governor of Massachusetts, is rumoured to have looked at staffing up in real estate. However, at present it seems to be getting its real estate fix from acquiring Asian property companies.

The Dallas-based private equity firm teamed up with a former GE Capital executive David Deniger in May 1994 to sponsor Olympus Partners, which raised two funds. But the firm ended its brief flirtation with real estate funds in 2001 when it sold control of Olympus to Deniger just as Olympus was finishing its third fund on a reported $600 million of equity.

Washington DC-based private equity firm Carlyle has kept separate real estate funds since 1993 and is among the most established opportunistic players today.