The New Tycoons: Inside the Trillion Dollar Private Equity Industry That Owns Everything (Bloomberg)

by Jason Kelly

  Nearing 70, Bonderman has been the stronger external proponent of an IPO as a means of selling some shares and has had private conversations with acquaintances and bankers to that effect. As early as 2007, he told an audience in Dubai that the firm would likely, eventually, go public if the rest of the industry’s biggest names did. “Five years from now, I think all the major guys will be public. We would like to be on the tail end of that,” he said.

  “Being public isn’t my favorite thing, but who remembers Brown Brothers Harriman,” he said in Dubai, referring to one of the investment banks that chose to remain private after Goldman Sachs and Morgan Stanley finally chose to sell shares through IPOs.2 TPG, people inside the firm say, wouldn’t mind being the Goldman in this parade.

  In 2012, Bonderman updated his theory, telling an audience in San Francisco: “We have no current plans but to sit and watch and see what happens.” He noted that at the investor meeting, an overwhelming number of limited partners in a survey had expressed disapproval about general partners going public, but that there was little evidence they were doing anything to change their behavior. “If there turns out to be no negative consequence, we’ll see happen in our industry what happened in investment banking.”3

  Coulter’s aforementioned youth benefits TPG’s timing. Almost two decades Bonderman’s junior and far from anything resembling retirement, he’s said he’d rather go public only if there’s a strong business case. If it’s simply about getting Bonderman some money, there are other ways to achieve that, either by borrowing money or selling a larger stake to a big investor. TPG sold small stakes to government funds run by Singapore and Kuwait in mid-2011. Carlyle, Apollo, and Blackstone all pursued similar strategies as fund-raising methods ahead of their IPOs. The choice to stay put, at least for now, is a differentiator Coulter seems comfortable with, giving him additional time to grow TPG outside of the public eye, and to some extent letting his competitors take the slings, and suffer the depressed stock prices that have been a fixture of private-equity firms listed on the New York Stock Exchange.

  TPG revels in being different. Its location, its appetite for risk, and the quirky chemistry of the founders all support that ethos. It was a theme I heard constantly from people inside and outside the firm. At a theoretical Thanksgiving family dinner, TPG is the cool bachelor uncle you want to sit next to. He’s always got great stories, and you never know quite what he’s going to say. That’s largely a tribute to Bonderman, but it’s an element Coulter has sought to meticulously sew into the fabric of the firm they’ve built.

  Coulter’s knack for putting finance into everyday analogies and metaphors—he used the Whopper hamburger to illustrate a point about pricing power (TPG once owned Burger King), and compared institutional investors’ allocation choices to his kitchen pantry—gives him at times the air of a folksy business school professor (to wit, he also cited the 1982 book, Megatrends).

  In person he is intense but friendly, favoring simple white shirts and monochrome ties most days, almost always with the sleeves rolled up, but just so. Rarely is a hair out of place or his tie even slightly askew. He drives himself to work and coached the soccer teams for his two daughters and son. The culture of TPG and those who work there tends to reflect the mix of Coulter’s smart-kids-can-be-cool ethos and Bonderman’s straight-up eccentricity. The latter has an absentminded professor vibe that has managed to engender a deep loyalty from those who’ve worked with and for him. He collects people and nurtures relationships, largely by relentlessly circling the globe. While omnipresent via e-mail and telephone, he’s rarely in one place for more than a few days. “Nobody is smarter than Bonderman,” said Tom Barrack, who met Bonderman in the 1980s working for the Robert M. Bass Group in Texas. “He is the No. 1 cerebrally smartest guy. He’s like a retriever, cutting across themes and cultures.”

  Because of the older founder’s tendency and desire to be constantly on the road (he’s been known to fly to China for a lunch appointment), much of the day-to-day vibe defaults largely to a Coulter ethos. He obsessively thinks about culture and process improvement; to make himself more effective, in 2011 he opted to hire a chief of staff to help manage the ever-growing TPG empire. Barrack said of Coulter, “He was a great complement to him because David is peripatetic and Coulter can sit down and build an organization.”

  The chemistry between the two unlikely partners is the defining element of TPG. While KKR’s Kravis and Roberts have distinct styles, they are at their core more alike than different. Not so Bonderman and Coulter. “You put them together and you’ve got a really interesting blend of risk-taking and risk-aversion, of ‘Let’s go for it’ and ‘Well, wait a minute,’ ” said Coslet, who was the first non-founder employee of TPG. “They bring out the best in each other.” Coulter said it occasionally works the other way, as well, with Bonderman “tapping the brake while I push the accelerator. It’s the ability to have different skill sets and coexist.” That was the case when TPG engineered a complicated deal to buy a stake in Chinese computer maker Lenovo to fund its purchase of IBM’s personal computer division. Coulter’s analysis ultimately overrode Bonderman’s instinct that it wasn’t a good deal.

  Being outside of New York seems to help distinguish TPG. TPG’s offices, with jaw-dropping views of San Francisco Bay, sweeping from the Golden Gate Bridge, past Alcatraz over to the Bay Bridge, make fancy art on the wall irrelevant. (The pithy line I heard inside TPG: “God is our decorator.”) Walking a line between Wall Street perks and California sensibilities, the firm provides lunch for all employees, but opts to bring in burritos or soups on most days, often served on paper plates, instead of keeping a working kitchen staff on site. That TPG ended up in San Francisco is a tribute mostly to the partners just liking the place. What was settled early was that they wouldn’t be in New York. “We didn’t want to be like everyone else,” Coslet said of the reasons to be outside of Manhattan. “We wanted to avoid being ‘Wall Street’ guys. . . . We knew it.”

  Coulter is fond of using a white board—in its absence, he’ll grab a piece of paper to scratch out a diagram—and the partners’ conference room adjacent to his office has a well-used board. During one conversation with me, he sketched out his vision of the private-equity world: the “three box model” divided among stock-pickers, deal guys, and portfolio managers. In that view of the world, stock-pickers choose what to buy like a public investor does, analyzing the merits of value and potential for growth. TPG’s expertise, he says, falls between the latter two—scouting transactions in unlikely places and then figuring out how to save them or make them substantially better through radical change. That, he said, is “the secret sauce.”

  He pointed out that about 70 percent of the firm’s deals aren’t substantially different from its brethren in private equity, with the balance being in situations that are seen as unworkable or undesirable to everyone else. Since that latter 30 percent brings a disproportionate amount of attention, it’s become a defining characteristic of TPG in the eyes of the public and in the media, Coulter said. Coslet described private equity in general, and TPG specifically, at its best as “fringe capital.”

  “It’s got to be situations where the mainstream money says, ‘I don’t want to do that.’ It’s J. Crew when the founding family wants to sell it and can’t find the public markets to buy it. It’s Continental,” Coslet said. “You have to do the stuff that’s hard. When you forget that, you do what a lot of us did at the top of the bubble. That’s a loss of recognition. You’ve got to get back to what we’re here for.”

  Coslet conceded that approach inherently comes with more risk. “If really smart people think when they get to a fork in the road they should go left, it’s probably the correct thing to do,” he said. “But we’ve always said, let’s figure out when to go right.”

  TPG has had misadventures, usually by veering into stock-picking. One deal, a stake in Washington Mutual that came and went within months, blew up practically before anyone knew what happene
d. The other is lingering. By dint of sheer size and profile, the record-setting takeover of TXU may stand as the final word on the buyout boom of 2007.

  In both cases, TPG appears to have simply bet wrong, and with disastrous financial consequences. Certainly that was the case with Washington Mutual. The bank was struggling as so many of its kind were in the financial crisis, and TPG bought a minority, non-controlling stake for $7 billion. The premise was that the financial crisis had bottomed out and TPG would reap a huge profit as WaMu, as it was known, got healthier. This wasn’t a deal where ops expertise could help. TPG was basically operating on an educated hunch. It went exactly the other way. The government ultimately seized WaMu and sold part of it to JPMorgan, wiping out TPG’s equity completely in the process. TPG and its co-investors lost about $2 billion (the balance was borrowed), with the firm’s fund taking a $1.3 billion hit, the worst single loss in its history.

  Betting big is part of the ethos of TPG, even if to Coulter’s point, it isn’t the only thing. A senior partner at a competing buyout firm told me: “When Bonderman is coming up to the plate, he’s looking to hit it over the fence.” Another rival put it more succinctly: “TPG has the biggest balls in the industry.”

  While its executive nerve center resides in San Francisco today, its technical headquarters is Fort Worth, Texas, and the roots of what was initially known as Texas Pacific Group—later shortened to TPG, presumably to make the increasingly global firm not sound regional—are there. The story began, oddly, with a fight over an interstate highway extension in Fort Worth that was opposed by a number of prominent residents, including Robert Bass, a scion of a wealthy Texas oil family. Casting about for a lawyer, Bass was pointed to Bonderman, a Washington attorney with the firm of Arnold & Porter. While his main area of expertise was complex bankruptcies (he’d worked as the trustee on the Braniff Airlines bankruptcy in the early 1980s), Bonderman devoted his pro bono work to historical preservation. He successfully fought a plan to demolish Grand Central Terminal in the late 1970s. A 1992 story described Bonderman as “a facile negotiator and deal maker with a finely honed sense of moral outrage and persuasion.”4

  His persuasion worked to great effect in Fort Worth. Bonderman helped prevent the freeway project, winning the admiration of Robert Bass, who was mulling a way to turn his inherited fortune into something even bigger, following the model of his older brother, Sid, who’d created a family office of his own, working with an investor named Richard Rainwater. Bonderman joined Robert Bass, eventually becoming the chief operating officer of the Robert M. Bass Group.

  As Bonderman and Bass began to assemble a team to sniff out deals, Bonderman was introduced to a young investment banker named Jim Coulter. Not yet 30, Coulter was a farm boy who earned an engineering degree at Dartmouth and went on to get an MBA from Stanford. He’d done a brief stint on Wall Street before moving into the world of investments. He jumped at the chance to work for Bass.

  Bass became a de facto incubator of sorts for the modern private-equity and real estate investment business. “The Basses had an incredible judgment about horseflesh, the talent,” said Clive Bode, a lawyer who worked for the family, counseled Bonderman, and eventually served as TPG’s general counsel.

  In addition to the founding partners of TPG, Bass employed Barrack, a University of Southern California-educated native Angeleno whose early career wound from lawyering in Los Angeles to counseling members of the Saudi royal family on investments to a post in the Reagan administration. When the Bass band broke up, Barrack went on to create Colony Capital, an LA-based firm that has picked up distressed real estate across the globe, including the nearby Neverland Ranch, once the home of pop star Michael Jackson. Fellow Bass investor Kelvin Davis was a co-founder of Colony; he’s now a partner at TPG. The Bass ethos, which dated back to Sid Bass and Rainwater, influenced the firms that it effectively gave birth to, Barrack said. “Everyone who came to Fort Worth felt paid attention to,” he said. “It was cordial not hostile, non-Wall Street, non-aggravating.” Another Bass investor, John Grayken, went on to create Lone Star Funds, a Texas-based investment firm focused mostly on distressed real estate. Others included hedge fund manager Marc Lasry, the founder of Avenue Capital.

  A main area of focus during the Bass years was sifting through the detritus of the savings and loan crisis during the late 1980s, when more than 740 thrifts failed. Bass’s boys deftly parlayed cash, debt, and government assistance into huge gains. For Bonderman and Coulter, the Bass milieu was what they constantly sought to create at what became TPG. “Our formative years were with family money, where we could walk down the hall and make the case for an investment,” Bonderman told me during a chat in TPG’s partners’ conference room, where the couch and coffee table serve as his office when he stops by TPG San Francisco.

  “People try and re-create where they come from. We’re trying to recreate the best attributes of a family investment office, and in our case, one that was chaotic and quirky,” Coulter said in a separate conversation. Comfort with chaos informed where the Bass group was trained to look for deals in unlikely places. Bonderman and Coulter identified a potential target nearby: the bankrupt, for the second time in a decade, Continental Airlines.

  The two men, convinced they could make money buying and fixing it, were eager to do the deal. Bass wasn’t interested under the auspices of the existing organization, but blessed Bonderman, Coulter, and another Bass partner, Bill Price, pursuing it on their own. The group scrounged together about $65 million of their own money, some from their partners at Bass, and Bass himself. They became the owners of Continental Airlines in 1993. They pursued a relentless strategy to overhaul the company, zeroing in on issues like baggage handling and food service. No detail was too small to be overlooked or commented on.

  During the first year they owned the airline, Bonderman and Coulter were on a Continental flight, sitting in coach class. When the hot meal arrived, they were horrified at what lay before them and asked a perplexed flight attendant if they could keep one. Upon arriving, they slid the meal into an overnight-mail envelope and sent it back to the airline’s Houston headquarters, to the attention of the CEO. Included with the meal was a handwritten note from Bonderman: “It didn’t look much better on the flight.”

  The food improved along with the rest of the airline. The investment group made more than 10 times their investment as it sold shares over the subsequent years. “It was a harrowing and hugely empowering experience for them,” said Kelvin Davis. “It set in place a core part of our foundation, cementing in their minds the value of operating capabilities.” For the Continental deal, there was no firm, per se, just a limited partnership, called Air Partners, that owned the airline. As the deal progressed, the two partners faced a decision. They could work with little or no staff, taking it deal-by-deal, raising money as they went. Or they could try and build a small infrastructure to pursue a handful of deals at multiple times.

  It wasn’t a slam-dunk decision, and while the two men agreed they weren’t wild about going the seat-of-the-pants route, Bonderman at least had no intention of building something that would become the size of what TPG stood at two decades later. “We never thought it would be what it is now,” he said. “We just set out to do a few deals.” Coulter brought a slightly different perspective. At 32, he’d decided this was exactly what he wanted to do for the rest of his career. “My time horizon was a little bit different,” he said. He’d also seen the power of the Bass confederation of brains and wanted to harness more than just what he and Bonderman could bring to the table. “If David and I just hung out a shingle, we might make more money in the short term, but we couldn’t attract the talent to build a long-term business.”

  With the Bass ties strong, the Texas Pacific guys kept in close touch with their former partners Barrack and Davis, who’d started Colony in 1991. Starting in 1994, the handful of partners working at Texas Pacific and Colony would gather annually at Bonderman’s home in Montana, and later in As
pen, where Bonderman moved and still has a home today. The multiday sessions were meant as strategy salons for the nascent investment groups. By 1996, Coulter was showing PowerPoint presentations about expanding TPG. “He was talking about it like a guy who was trying to build a real business,” Davis said.

  TPG, by virtue of the size of its funds, its deals, and historical returns, belongs in the top ranks of the big global private-equity firms. Like its slightly larger brethren, it has pushed, albeit somewhat more tentatively, into areas beyond leveraged buyouts. The firm backed a hedge fund, called TPG-Axon, but does not control it. Rather than setting up a separate real estate business with dedicated funds as a number of larger competitors did, TPG chose to pursue those deals through its existing buyout funds. There have been internal discussions about raising a dedicated real estate pool, under the auspices of Davis, who left Colony and joined TPG in 2000.

  TPG therefore straddles the worlds of pure private-equity investing and the broader, alternative asset strategy pursued more vigorously by Blackstone and Carlyle, and to some extent, KKR. That potentially makes TPG more vulnerable, at least in the short term, in so far as a series of bad deals, or a bad fund that spooks a herd of investors, could radically change the future of the firm. TPG’s chemistry has so far allowed it to endure. Bonderman and Coulter have cultivated an air of quirky hip—at least as quirky and hip as you can be in the investment business. An executive at a rival firm told me: “TPG has an aura of cool that transcends performance.”

  Like Kravis and Roberts, Coulter obsesses over his firm’s culture. He loves to talk about it and analyze it. When I even mentioned the word during one interview, he lit up, leaning forward into the table between us to emphasize certain points. “As you go through a career, you start worrying for other people and looking for the satisfaction not just of the next deal, but of building something,” he said. “David and I always took the position it was not about us and that someday we wanted to leave with no one noticing. I want to be able to look at the 27-year-old who wants to work at TPG and say, ‘You can make a career here.’ ”