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Private Equity

Buyout titan TPG to stay private, parting ways with KKR, Apollo

Jim Coulter, co-founder of TPG Capital

For years, Jim Coulter and David Bonderman, the billionaire co-founders of private equity titan TPG, flirted with the idea of selling shares in their own firm to the public.

No longer. Mr. Coulter and Jon Winkelried, the former Goldman Sachs Group (GS) president who took over for Mr. Bonderman as co-chief executive three years ago, have decided to remain an old-school partnership. TPG has instead explored other private financing arrangements, including a possible sale of a stake in the company, according to people with knowledge of the deliberations.

TPG remains a holdout among peers, such as Apollo Global Management, Blackstone Group, Carlyle Group and KKR & Co., all of which went public over the last decade or so. Inside and outside the firm, some consider TPG's approach to be a competitive advantage because it can focus on a long-term strategy that has tended to yield uneven returns.

"Their successes come in terms of taking the path that others haven't taken," said Susan Chaplinsky, a University of Virginia business school professor.

TPG's decision comes as the firm tries to raise at least $14 billion for its flagship buyout fund and a pool that would invest alongside it in health-care deals. Its strategy signals that the debate over the ownership structure of private equity funds is far from settled.

"We have chosen not to be a public company and not to define ourselves around AUM," or assets under management, Mr. Coulter said, during a June meeting with one of the firm's largest clients, Oregon Investment Council. TPG declined to comment.

Unfortunately for those who paid up for rivals' stocks — and making TPG's decision perhaps easier — they have been lousy performers. Blackstone, for example, is barely trading above the $31 price at which it went public more than a decade ago. These firms have seen their stock prices struggle in part because of the earnings volatility associated with private investments.

"Being a publicly traded partnership restricts your investor base to mostly hedge funds, which are more focused on quarter-to-quarter performance," said Patrick Davitt, an analyst at Autonomous Research.

Mr. Bonderman, a 75-year-old former attorney, and Mr. Coulter, a Stanford MBA 17 years his junior, met while working for Robert Bass, the Texas billionaire oil man and investor. (TPG stands for Texas Pacific Group, the original name.)

The upstarts parted with Mr. Bass to pursue a restructuring of bankrupt Continental Airlines in 1993, which marked the start of TPG. Investors who joined them multiplied their money almost ninefold, even after paying stiff fees.

In its heyday, TPG led blockbuster buyouts for marquee names such as J. Crew Group, Burger King and Petco Animal Supplies.

But like many of its peers, the buyout team ran into trouble making highly leveraged and ill-timed bets in the late 2000s, which cost investors billions of dollars. The firm played a part in some of the industry's biggest flops, including investments in savings bank Washington Mutual, casino operator Caesars Entertainment and utility Energy Future Holdings.

Since then, TPG, which is based in San Francisco and Fort Worth, Texas, has tried to regain credibility in part by doing smaller deals, using less debt and investing in startups such as Uber. Recently, TPG has shown big gains from investments in Greek yogurt maker Chobani, Adare Pharmaceuticals and broadband provider RCN/Grande.

With $98 billion in assets, TPG is still smaller than its public rivals, which each oversee more than $100 billion. Like those firms, it has diversified away from the classic private equity approach: corporate buyouts. Growing lines of work include funds investing in small, fast-growing companies, real estate and outfits thought to benefit society.

One of its most successful operations: private credit, which involves making loans to smaller companies or snapping up cheap debt. Started in 2009 and led by former Goldman Sachs partner Alan Waxman, it has grown to $25 billion, rivaling the size of its main buyout business, where TPG made its name.

TPG will have to work to resist the siren song of its own publicly traded stock: vast potential funding, a currency to attract talent and the prospect of tens of millions, even hundreds of millions of dollars for executives.

But the decision to stay private could help TPG's relationship with customers, known as limited partners. These investors say that public ownership puts pressure on firms to increase their size and management fees, rather than find the most lucrative deals for customers. TPG will also be able to focus on growing its business without public shareholder scrutiny.

Privacy has downsides, too. Public rivals are able to use stock to expand into other businesses. In 2008, Blackstone used stock to help fund its purchase of credit firm GSO Capital Partners. KKR aggressively uses its balance sheet to fuel growth, rather than always having to turn to customers.

To raise money without going public, TPG has held discussions about structuring a deal with large investors who would supply funding for expansion, according to people familiar with the talks who requested anonymity because they were supposed to be kept confidential.

Other private equity companies have raised money by selling stakes to outsiders, and TPG has done so in the past. In 2011, when it sought capital for expansion, TPG sold a minority stake to the Government of Singapore Investment Corp. and the Kuwait Investment Authority.

In 2008, TPG raised a $19.8 billion fund, its largest. But it has returned a middling 11% annually when taking fees into account. Its 2015 fund is doing better, returning 22% annually — including leverage — as of the end of March.

TPG has taken some losses in Europe, including a $168 million investment in U.K. discount chain Poundworld Retail, which sought protection from creditors in June. After a restructuring of the Europe team, TPG refocused on sectors such as health care and technology.

Doubling down on health care, TPG is raising a $2.5 billion fund to invest alongside its main buyout pool. Todd Sisitsky, who gained recognition for winning bets on health-care companies, is overseeing the new buyout fund alongside Jack Weingart, who has led the firm's fundraising group. At the end of last year, TPG had almost tripled the money it invested in health-care companies since 2003, according to an investor document.

"Our strongest, deepest sectors at this point in the cycle are health care, technology, internet, digital media and tech-enabled consumer," Coulter said during the Oregon meeting.