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Illustration by C. Hoffman
Illustration by C. Hoffman
TPG's co-founder Jim Coulter: "It's time for us to enter the narrative" Gabriela Hasbun
It's a late August morning in Jim Coulter's office on the 33rd floor of one of San Francisco's tallest buildings, and the view has cleared. With the fog burned off the Bay, the Golden Gate Bridge is glittering in the sunshine. It's a glorious San Francisco moment, but Coulter doesn't seem to notice. Instead he's at a whiteboard, diagramming the private equity business in green marker.
"It's a three-box model," Coulter says, drawing boxes and filling them in with abbreviations—"SP" for "stockpickers," "DG" for "deal guys," and "PM" for "portfolio managers."
Coulter, 51, along with David Bonderman, 68, is co-founder of the 19-year-old private equity firm TPG Capital, which has engineered many of the largest and most visible deals the industry has seen, including the 1997 purchase of J. Crew for $475 million and the 2006 initial public offering, which valued the company at $1.1 billion; the $43.2 billion acquisition of Texas utility TXU, renamed Energy Future Holdings; and the $27 billion takeover of casino company Harrah's, now known as Caesars Entertainment. TPG, with 278 employees in 14 offices, controls $48 billion of investments, putting it at the top of the private equity world, along with Blackstone (BX), Carlyle, and KKR (KKR). Such success has put Coulter at No. 221 on Forbes' list of the wealthiest Americans, with an estimated net worth of $1.8 billion. (He is tied with Bonderman, also at $1.8 billion.)
Each player in the buyout industry uses its own blend of Coulter's three boxes. TPG, Coulter says, emphasizes portfolio management and deals. Portfolio management isn't about stocks. Rather, it's a focus on improving the performance of acquired companies, often in the tiniest ways. Coulter argues that it's TPG's operations team—60 fixers who go into companies and search for efficiencies—that sets the firm apart, not the stockpickers or deal guys, who put the purchases together. "There is some secret sauce to what we do," he says.
"Private equity," strictly speaking, describes a business that deploys capital outside of the public markets, but the "private" is often emphasized in its secondary meaning as well. It's traditionally among the most secretive of businesses, partly because a deal is like a poker hand, best deployed by surprise, and partly because the fees, and some of the industry methods, such as paying out enormous dividends from overleveraged acquisitions, work better when no one is watching.
That has changed, to some extent, as private equity firms have gone public. Both Blackstone and KKR are now publicly traded, and Carlyle is said to be mulling an offering in 2011. TPG has held out, and Coulter says there are no plans to take the firm public.
It's unusual for TPG to invite a reporter into the firm, but these are unusual times for TPG, and for private equity. Returns, in aggregate, are beginning to look a lot like those of the market, which threatens the rationale for the industry and its eye-popping fees—usually 20 percent of any profit it creates for investors, along with a 2 percent management fee, win or lose.
In general, an investor in private equity commits money to a fund for 10 years. Thus, most judge a fund's performance after it's had five or so years to make investments, grouping them by "vintages," the year a fund started investing. According to PitchBook, a private equity deal database, the average return for funds raised in 2001 was 22 percent, while funds from 2005 were averaging 4 percent. TPG's funds, in that time, returned similar results. And it's still lugging around boom-era baggage, including Energy Future and the memory of losing $1.3 billion in a minority investment in Washington Mutual.
The profile of its deals and the wider notoriety of the industry in the public and political spheres mean TPG can't operate in the shadows anymore, unless it wants its critics to be the only ones talking. "We're more in the public eye," says Coulter, who argues that some of the anger at private equity, from anti-Wall Street politicians, labor leaders, and disappointed investors, comes from a misunderstanding of what the firms—and his in particular—actually do. "It's time for us to enter the narrative," he says.
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