High finance make your head swim? Relax. If you’re not smart enough to understand how institutional investors plan their deals, I am here to explain.
To accomplish this public service, we will need an example. Fortunately, one is at hand right here in Louisiana, where the Teachers’ Retirement System is about to make a $150 million investment.
First thing you need to know is that this is chickenfeed. Shoot, the system has “unfunded liabilities” of $10.8 billion. That’s fancy talk for being in the hole to that amount. There’s nothing to this lark once you can speak the lingo.
Rare is the retirement system, public or private, that does not have much less cash on hand than it has promised to disburse, although this one is among the most unsound around. No need to be alarmed, however. It just means that the board will feel obliged to take extra care with the money in its trust.
That, presumably, is why it is poised to entrust that $150 million to the Texas Pacific Group, ace exponent of the leveraged buyout. Don’t know what that means? It’s simple. All you do is buy a company with borrowed money, using its own assets as collateral. It’s certainly a clever trick, but the stakes tend to be pretty high.
In fact, TPG, along with Goldman Sachs and Kohlberg Kravis and Roberts, pulled off the biggest leveraged buyout ever, when they paid $45 billion in 2007 for the Texas utilities company, TXU, which was then renamed Energy Future Holdings.
Alas, what the future held was all woe and lamentation, for the company went bankrupt in 2013 and the billions went down the drain. Even by Wall Street standards in recent years, this was a spectacular failure.
Hang on, Gill, I can hear you saying. First you tell us the Retirement System chose TPG because it wanted a prudent investment vehicle, and then you report that TPG engineered the dumbest takeover in history. You sound confused.
That is how it will seem to the unsophisticated, but the financial expert will see TPG as a logical choice, because experience is vital in the investment world. TPG has an unmatched opportunity to learn from its mistakes.
Experience is not the only consideration, of course. This business depends on trust, and TPG can be relied upon to play fair. Last year, along with two other takeover firms, TPG paid $325 million to settle a lawsuit alleging collusion to stiff investors by fixing prices. After that PR disaster, we may be sure that TPG got religion.
If all this was not enough to demonstrate that TPG has every incentive to make wise investment decisions from now on, this month brought further confirmation when Caesars Entertainment Corp. filed for bankruptcy. That means another bath for investors in TPG, which acquired a huge chunk of Caesars through a $30 billion leveraged buyout in 2008.
That was right around the time TPG came up with further billions to rescue the Washington Mutual Bank, which duly went bust soon thereafter.
There is no room for timid souls in this business and nobody can accuse TPG of lacking the requisite strength of character. It has come out swinging.
Still, the last few years have evidently been somewhat chastening, so TPG, the Wall Street Journal reports, is “focusing on smaller deals for its latest buyout fund,” for which it seeks to raise $10 billion. The Louisiana Teachers Retirement System is expected to contribute $75 million to that cause and a similar amount to a $3 billion TPG “growth equity-oriented fund.”
Unfortunately I do not have enough space to give you an education in growth equity oriented funds, but by now you should know what considerations must be weighed by those smart characters whose job is playing with other people’s money.
In fact, you probably understand high finance just as well as I do.
But not as well as Paul Yett, managing director of Hamilton Lane, TRSL’s “private equity manager,” who can hardly be gainsaid when he notes that TPG has “highly experienced investment and operating teams.” TRSL’s “commitments to three prior funds” are “generating positive returns,” Yett says, so here’s hoping its luck holds.
James Gill’s email address is email@example.com.