How TPG Learned to Love Disruption
(Bloomberg) -- TPG, with more than $104 billion under management, is an established contrarian in the private equity industry. Founded in 1992 by David Bonderman and Jim Coulter, two alumni of the Robert M. Bass Group, the company once known as the Texas Pacific Group has headquarters in Fort Worth and San Francisco. It remains a partnership when most rivals have gone public. And it’s expanded into areas such as credit, real estate, and early-stage technology investments, with notable success in the likes of Uber Technologies Inc. and Airbnb Inc. When Bonderman decided to step down as co-chief executive officer in 2015, Coulter recruited Jon Winkelried, a former Goldman Sachs Group Inc. executive.
Replacing a founder is never easy. Winkelried’s task list—including putting structure on an intentionally unstructured group of dealmakers and creating a more diverse workforce—got even trickier this year. William McGlashan, the star manager of TPG’s growth and social impact funds, was charged in an alleged criminal conspiracy to rig U.S. college admissions. (He pleaded not guilty.) He was pushed out of TPG, and Coulter assumed his responsibilities. An internal investigation found McGlashan in 2017 introduced TPG funds to the admissions scam’s ringleader, who pitched them on his ideas, but the funds passed on investing with him.
In an interview with Bloomberg News’s Jason Kelly, Coulter and Winkelried, both 59, talk about TPG’s history, their relationship, managing through crisis, and how they’re maintaining TPG’s contrarian roots.
JASON KELLY: This is a firm that was essentially founded on something of a contrarian bet on a bankrupt airline. Tell me about that.
JIM COULTER: It was not obvious that you would begin a firm by investing in the least admired company in America, Continental Airlines. [It] had been led by the single most hated CEO in the industry and was a cyclical commodity business. In spite of the size and notoriety of the company, we were essentially the only investor who showed up with capital to restructure an airline. So the very roots of our business were based on taking on problems that other people had perhaps seen but not been willing to take on.
JK: Was that an ethos you picked up from the Bass organization? Or was it just who you and David [Bonderman] were?
JC: I think it was both. Starting with family capital, we never had to raise capital to do transactions before Continental. And while everyone wants to be a contrarian in theory, actually raising money for something contrarian is difficult. The private equity industry has been set up in a way that makes contrarianism more difficult. The best way to raise money in private equity is to point to a deal you did five years ago and show that it worked out well and to say that you will do the same type of deal for the next five years. That is a great money-raising strategy; it is not a good investment strategy.
JK: Jon, I’m going to ask you this question: Could this firm do Continental today? Or would it?
JON WINKELRIED: Absolutely. We create an environment around here where we have a very open process in terms of vetting opportunities, vetting different styles of investment, pulling in the best capability and best resources from across the firm.
JC: We haven’t changed at all. What’s changed is the marketplace. If Continental Airlines showed up today there would be 74 distressed investors circling around it. So would we do the deal? We’d certainly do the same deal over again. But the market has moved, which means we’ve had to. And one of the challenges of being contrarian is as soon as you’re successful at it you have to do something different because it will no longer be contrarian.
If you think about our history, it’s expressed itself over and over again. We were among the first people to do tech buyouts. And we did that because David and I were in a meeting and someone asked us what we didn’t do, and our answer was technology. And we walked out of that meeting, looked at each other, and said, “That didn’t seem right.” So we started our efforts in technology. We went to Asia when people hadn’t. It’s an intellectual and business problem-solving ethos. We viewed Continental Airlines as a problem that had to be solved. We viewed the question of “How would you do tech buyouts?” as a problem to be solved. We view the moment we have in the unicorn investing world as a problem to be solved.
JK: What was the conversation between you and David that helped you realize this was going to be a distinct firm—that you were going to raise outside money and build a business?
JC: The buyout business in 1993 was about simplicity and stability. It was all about buying steady cash flows and franchise businesses and adding leverage. The idea of changing management or strategy was not widely embraced. We built the business from the beginning to invest in change because we thought if we could intellectually sort out change, we could have differential returns.
JK: You were working for this family office down in Texas. You were 32, 33 years old. Bonderman was an ex-bankruptcy lawyer who saved Grand Central and prevented a highway from being built in downtown Fort Worth. How much did you play on the idea that we’re not KKR, we’re not Wall Street “barbarians at the gate”?
JC: We were either visionary or naive. And at the moment you’re never sure which one. So we set up in Texas and San Francisco. We basically started out doing airline investing and health care during the Clinton health-care initiative. That strategy continues—today we’re doing gene and cell therapy deals because that’s a change in the economy.
JW: I knew this firm as a client for a period of time obviously from my days at Goldman. I always knew TPG to be slightly different. First of all, they were on the West Coast, so they weren’t part of that financial community in New York. And so their perspective was a little different. I also knew the firm because I had been an adviser to Alan Waxman, who built our credit business here. Alan is not a very conventional thinker. When I was first contacted by Jim, I was immediately intrigued because of: one, what my perception was of what they had done and how they had done it; and two, the fact that it was not a New York-based firm. Most people are surprised to hear that I might not have taken this job if it was in New York because I was actually looking for something that was different. Here [in San Francisco] investing is very important, but it is actually the second act. Because tech and innovation is kind of what this place is about.
JK: OK, Jim, so what prompted that call?
JC: We had this moment where David was going to be stepping back from the business. We needed a set of skills and leadership that probably didn’t exist within the firm because the firm had been about investing and probably hadn’t established itself as a merchant bank, as some of our competitors had. When I looked at Jon’s career and how he got to his position at Goldman Sachs, he had gone into different parts of the business and he had been successful in every one. That is really hard to do. He had led investment organizations and managed huge balance sheets. So he had the investment ethos, but he had a set of management skills. And we wanted a leader who is curious and interested. So I was fascinated that in New York he was spending his time with a venture capital firm. Every hedge fund in the world had been interested in having him be part of it—he had been approached for every position. But he was choosing to spend his time [in venture capital] because it was interesting to him. And so that type of ethos, management skill, continual success, and then curiosity were all one package.
JK: Jim, you’ve lived most of your adult life in this partnership. Jon, that would present some challenges for anyone coming in as a co-chief executive. How much did you worry about that?
JW: I wouldn’t say worried. I would say it was a very important element of the decision: I’ve got to feel like this partnership can work. So it led to about a five-month process of meeting people here and spending time with Jim. We had a series of meetings, mostly in Jim’s office here, in this conference room, and we talked about the firm, we talked about some of the challenges. But that doesn’t answer the question of “Can the partnership work?” So I called Jim, and I said, “Listen, let’s do something out of the office.” I suggested that he come visit my ranch in Colorado. And for me that was an interesting turning point. Because he came out, we spent about four hours or whatever it was in the afternoon in a river on my ranch, basically fly fishing. He got to see me in a different environment, in a different light, with people that worked for me there around me. People have this image of people who’ve gotten to very senior levels at Goldman Sachs. I do think [it helps to] take that context and get rid of it for a second and sort of look at one another as people. What do we talk about when we’re not talking about deals? How do we engage with people that work for us? How do we engage with our significant others? We got connected at a slightly different level. And I had a lot more confidence coming out of that. We’re not going to see the world the same all the time, which is actually a valuable thing, but it would be a good partnership. My wife and I talked about it, and she said, “I think you’re actually going to do this.” And I said, “You know what? I might.”
JK: So, Jim, did you leave the ranch thinking the same thing?
JC: In the early decisions about building this firm, it was not only about being in San Francisco but it also was about not being in New York. And so the non-New York part of Jon was important to me also. But ultimately I think the whole thing turned on fish and horses. (Laughs.) You know, as an investor you learn to observe things. I love to watch investors in casinos. I don’t gamble personally, but watching how people deal with risk is sort of interesting. For managing a private equity firm, fly fishing is good. You have to have a lot of patience. You have to constantly be changing what you’re doing and figuring out the situation. Jon is a much better fisherman than I am. So watching him work the problem was interesting.
And you want to find ways that you overlap with people. Jon had chosen to use a fair amount of his time after Goldman to become a very accomplished amateur cutting horse rider. My daughters rode competitively in the national and international circuit. So horses were in my life also. In horse competitions, it’s never quite all your fault and never quite all the horse’s fault if things don’t go well. So you have to learn to fail as a team. And win as a team. That’s the culture of TPG. We fail and win as a team.
JK: So Jon, what did you see as your No. 1 mission when you walked in the door?
JW: I walked in the door, fall of 2015, and saw a rapidly evolving firm. During the financial crisis the firm [had] decided that it had an opportunity to innovate. There was the development of a credit business, a growth equity business, a real estate business that was not just buying trophy buildings. And the further buildout of our Asia franchise given what was going on with the emergence of China. Only really one business was what I would call scaled and mature, and that was [TPG] Capital. I had seen the evolution of an organization that had multiple businesses being incubated and driven. So to use the horse analogy, this was not my first rodeo around that. I have had a lot of experience dealing with a lot of ultramotivated A-type people that want to build businesses. And I felt like the combination of my skill set with Jim’s perspective would be quite powerful in terms of taking us to that next level. But at the same time, constantly focusing on the identity of TPG. You have TPG Capital, TPG Growth, TPG Real Estate, but you have TPG—what does that represent? And we’ve been very focused on this element of, What are our values?
JK: Jim, how controversial was your hire inside the firm?
JC: There were a lot of questions and a lot of people who would have, at that moment, perhaps preferred other structures. But I think the certainty with which I suggested that that was the right structure, and my clear articulation of the need to do so—that it wasn’t about me and it wasn’t about Jon, it was what the firm needed to be successful—meant that the doors were open when Jon came in. We made the decision to not have lanes. For the first couple of years we basically said we’re doing it together. That was a key decision because it would have been easy for people to split us or pigeonhole one or the other of us in a function. Co-leadership has to be a joint effort.
JK: The crisis was brutal for the industry. You had some notable and very public misses. What was it like?
JC: If you look at the firm’s history, we’ve been contrarian, we’ve been innovators, we’ve been kind of West Coast. The only time we varied from that was 2006 to 2008. We decided to innovate in [terms of deal] size. We and a few other people in the industry said that we were going to go into larger deals. We lost our differentiation because those deals were done in consortiums. Everyone had problems. So that was the one innovation that hasn’t worked for us. And once you take away the idea of ever-larger funds and ever-larger deals, the idea of growth and problem-solving begins to move into different sectors and products. Private credit took off post-crisis, so we made a big effort with Alan and his team to build private credit. It’s the era of disruption, so we became the industry leaders in disruption investing. It’s the era of sector funds, so within our funds we began to build sectors. What we did was basically return to the curiosity differentiation and the values we’d had since ’92.
JK: Were investors receptive to that?
JC: The private equity marketplace is always focused on what you’ve actually done. We could look at prior to 2006. And the midsize contrarian deals we did in 2006 and 2007 returned three times their money. What pulled us down were the larger deals. So we basically said that we were going to do what we’ve always done. And if you look at the record, it’s been extremely strong. And the record, post-crisis, would be the same.
JK: There could be an argument that what made TPG great was it was a bunch of people able to do their own things. How do you institutionalize a culture that is built on anti-institutionalization?
JW: It starts with not losing that sense of freedom that people have to pursue what they think is really interesting or different. We have tried to focus on using the resources that we have to promote this idea of innovation and creativity. I use an expression that I think maybe people didn’t use as much here before, which is being commercial. Where are there opportunities or seams in the market where we see interesting things? Figure out a way of bringing that to our clients and develop pools of capital, in some cases, that didn’t exist before. We were seeing really interesting opportunities to do some things first. Employees selling secondary common [stock] is an example. We knew these companies; we had relationships with the CEOs. And so we developed a pool of capital that actually can help prosecute those opportunities. It’s an opportunity that our investors like, and so we raised $1.6 billion in a tech adjacencies fund. And in the world we live in today, people care about what you stand for. People don’t want to be forced into some kind of a lane. But what people realize today is it helps them do their business when the overall brand that wraps around it is something that people admire, want to be partnered with, want to be connected to.
JK: So arguably one of the biggest tests of that, and maybe of your partnership, came just recently with Bill McGlashan being caught up in the admissions scandal. What does it change about the way you interact with your people and the way you interact with investors?
JC: It’s clearly an unfortunate moment when external personal activity reflects on anything we do the way this has. But it’s also an important values and teaching moment. The message that Jon and I were very consistent upon is there are things that you run into sometimes that you cannot control, but you can control how you react to them. Our reaction has been very clear and straightforward. So, as unfortunate as it has been, it’s also been important for Jon and I to have the firm know who we are with even more certainty and to illustrate for the firm how important conduct of all sorts is.
JK: My understanding is you have physically moved now to a different floor. I would imagine that sends a message to the team.
JC: It took us maybe seven minutes to make a decision of what we needed to do on the personnel side and that I would step in personally. Our partnership is such that that does not leave the firm in any way uncovered for what it needs to do. For 20 years I was co-CEO of the firm and ran a piece of the firm day to day, and only in the past couple of years I’ve stepped out of that. So it was natural for me to step in. We in no way underestimate just how important it is to react the right way for our LPs, for our portfolio companies, for impact investing, and for our teams.
JW: If you just have a collection of individual businesses and something like this happens, your ability to respond and recover is much more handicapped than if you have a firm where you’re constantly engaging with one another and people feel that engagement. We have created as seamless a transition as you possibly can. That doesn’t mean it’s without its bumps. And we have more things to do, which we will be doing. But the existence of a culture, of people feeling like they’re part of something bigger, to me it’s just essential.
JK: I asked earlier whether TPG would do the Continental deal today. A variation on that is: Does the same sort of person you recruited then show up at TPG today?
JC: As we have been building our teams we have focused on innovation. And we find that innovators are attracted to innovation. You could win a lot of money in San Francisco in a bar bet saying, “Name the people who are inside the boardroom in Spotify, Uber, and Airbnb.” Because no one would think it was TPG. They would think it was some venture firm. But somehow we were willing to commit capital when our competitors weren’t. If you look at our portfolio you would find many more disruptors than traditional incumbents. If you are an incumbent, you are more at risk than anytime in my career and probably anytime in the last 100 years.
Kelly is New York bureau chief and the co-host of Bloomberg Businessweek on TV and radio.
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