TPG Growth, a Red-Hot Investor, Stays Small as It Pursues Deals

Posted December 18, 2017 4:01 p.m. EST

LONDON — An early backer of the likes of Uber and Spotify, TPG Growth is one of the most prominent investment funds in Silicon Valley. But as it closes its fourth investment vehicle, the firm is keeping things on the smaller side.

TPG Growth is expected to announce on Monday that it has raised $3.7 billion for its latest fund, only a little more than for its last one — even though it would have been easy to raise much more, as investors in previous funds are eager to pile in yet more money, according to TPG Growth’s founder and managing partner, William E. McGlashan Jr.

“The typical model is, when I can scale, I scale,” he said in an interview at TPG’s London office. “There’s an inexorable pull to scale.”

But making TPG Growth much bigger, he added, would have affected the kinds of companies the fund could invest in to achieve the same kinds of returns it now has. (TPG Growth’s third fund, which closed two years ago, has generated a return of 13.6 percent so far, while its second fund, which closed four years ago, has returned 25.3 percent, according to the data provider Pitchbook.)

“It’d change the kind of companies we’d invest in,” McGlashan said. “It’d change the role we’d play.”

Until a few years ago, McGlashan’s fund seemed like an outlier within the sprawling overall business that is TPG, the $73 billion investment firm better known for acquiring companies like Continental Airlines, Neiman Marcus and J.Crew. But TPG Growth’s impressive track record and high-profile portfolio have lifted its prominence, particularly at a time when traditional leveraged buyouts have been eclipsed in stature by TPG Growth’s favored style of using growth investments, particularly in fast-rising technology startups.

Among TPG Growth’s better-known moves:

— A stake in Uber in 2014, one that valued the ride-hailing company at $2.75 billion — far less than its most recent round, which pegged the company as being worth nearly $69 billion.

— A stake in Airbnb, the short-term home-rental service, at a valuation of $10 billion, well below its current $31 billion valuation.

— Co-creating the movie studio STX, which is reportedly weighing a stock market listing in Hong Kong to take advantage of its success in the Chinese movie market.

— Investments in Apollo, now one of Myanmar’s biggest cellphone tower operators, and in the Myanmar Distillery Co. Group, which TPG sold in fall at a reported profit.

— The creation of the Rise Fund, a $2 billion social impact fund that aims to create societal benefits as well as financial returns.

With the close of the fourth fund, TPG Growth now has $13 billion in assets under management and a mandate to continue finding new investments.

“Growth equity is essential to TPG’s overall investment strategy, connecting us to rapidly changing industries and emerging trends around the world,” Jim Coulter, TPG’s co-chief executive, said in a statement. “Bill McGlashan and the TPG Growth team are helping to drive innovation in our portfolio, our firm and our industry.”

At TPG Growth, McGlashan said, the idea is to help younger companies grow, harnessing the resources not just of his fund, but of all of TPG.

Such is the clout of the fund that it has been able to command preferential treatment at times. When Box, the online storage provider, raised money from TPG Growth and Coatue Management before its initial public offering, it did so at a $2.4 billion valuation. But that investment came with terms that allowed TPG Growth and Coatue to get more shares and pay a lower price for their investment if Box did not reach a certain valuation in its IPO.

Ultimately, Box fell short of that level, and TPG benefited.

Such investments, McGlashan said, represented the ardent desire of startups to hit certain valuation targets, particularly to reach the “unicorn” status of being worth $1 billion or more. “If you let me write the terms, I’ll give you whatever valuation you want,” he said.

It is a practice that has largely fallen out of favor, as startups and investors alike have eschewed chasing unicorn status for its own sake.

But while TPG Growth has gained accolades, a new investor in startups has stolen the spotlight over the past year from more traditional investors: SoftBank’s $97 billion Vision Fund, a giant vehicle that venture capitalists alternately fear and envy.

Asked if the Vision Fund completely eclipses what TPG Growth can do, McGlashan dismissed such concern.

“Are we noncompetitive?” he said. “The fact is, they occupy a fundamentally different space.”