KBRA Publishes and Affirms Ratings for TPG Operating Group II, L.P.

22 Apr 2024   |   New York


KBRA publishes and affirms the issuer and senior unsecured debt ratings of AA- for TPG Operating Group II, L.P. (TOG II), a subsidiary of TPG Inc. (NASDAQ: TPG; "the firm"). In addition, KBRA assigns a subordinated debt rating of A+. The Outlook for the ratings is Stable. On April 11, 2022, KBRA assigned issuer and senior unsecured debt ratings of AA- with a Stable Outlook to TPG Operating Group II, L.P. on an unpublished basis. On April 11, 2023, KBRA affirmed issuer and senior unsecured debt ratings of AA- with a Stable Outlook for TPG Operating Group II, L.P. on an unpublished basis.

The ratings are supported by TPG’s advantageous market position, which continues to benefit from its growing scale and diversification, further enhanced by the strategic acquisition of Angelo Gordon (AG), which added a scaled credit business and complementary RE strategies to TPG’s historically private equity focused platform. With substantial dry powder of $51 billion at YE23, limited client overlap with AG, and ample opportunities to leverage resources across the combined platform, TPG is well positioned to capitalize on organic growth prospects and secular tailwinds, notably in the private credit space. TPG’s strong performance track record and extensive fundraising capabilities, including during more challenging market dynamics, have produced considerable growth in AUM, revenue, and EBITDA since inception. Moreover, KBRA expects considerable EBITDA growth in 2024 underpinned by a significant cache of FAUM subject to step-up and AUM that has yet to collect fees ($24.4 billion at YE23) combined with a full year benefit of AG’s operations, continued fundraising tailwinds, and a more constructive realization environment to date. Revenues and EBITDA benefit from a high level of base management fees, particularly when compared with traditional asset managers, as well as a strong track record of performance fee generation from multiple funds and investments. Management fees (based on committed/invested capital) are viewed as stable/predictable. Meanwhile, AUM and fee levels are not susceptible to redemption risk as funds are predominantly closed-end with long life spans. Additionally, TPG’s future ability to generate performance fees is considered robust given the large stock of unrealized performance fees and management’s continued ability to create value and generate returns above hurdle rates. Following TPG’s 2021 IPO, TPG Operating Group is entitled to 20% of realized carry, 65%-70% goes towards partners’ performance allocations, and 10%-15% to RemainCo Partner Holdings, L.P., which owns certain excluded assets. TPG also benefits from a flexible cost base, which augments cash flow resiliency. In February 2024, TOG II issued $600 million senior notes and $400 million subordinated notes. Pro forma gross recourse debt/EBITDA was 1.4x at YE23, which is within rating category assumptions and expected to naturally delever over time. Interest coverage is anticipated to remain sufficient over the medium term. In addition, KBRA notes the modest level of senior debt at TOG II which, combined with the expectation that the capital structure will remain unchanged over the foreseeable future, supports the subordinated debt rating assignment at one level below the senior unsecured debt rating of TOG II. For TOG II's subordinated notes, KBRA also recognizes the capital-like elements of the note issuance, including the ability to defer coupon five years before default and the long life span of the instrument (40 year maturity), which speaks to durability.

KBRA considers TPG and other private equity and private credit focused asset managers as a fundamentally stronger asset class versus other types of financial institutions given comparatively stable management fees augmented by the opportunity to generate considerable carried interest and investment income. In addition, a flexible cost base adds to the resiliency of these firms. The industry outlook is favorable for continued AUM growth, particularly among alternative asset managers such as TPG which have strong performance track records and can offer compelling strategies beyond traditional equity and fixed income funds with more limited mark-to-market volatility. For asset managers focused on private equity and private credit strategies, AUM and management fee levels are not susceptible to redemption risk or net asset value risk. Funds are closed-end with long life spans and management fees are based on committed capital or invested capital (at cost). The resiliency of larger managers is enhanced by multiple funds, strategies, and fund vintages combined with portfolio company and geographic diversification.

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Further information on key credit considerations, sensitivity analyses that consider what factors can affect these credit ratings and how they could lead to an upgrade or a downgrade, and ESG factors (where they are a key driver behind the change to the credit rating or rating outlook) can be found in the full rating report referenced above.

A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA

Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.

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