When you think of TPG, you think of Texas Pacific Group — one of the largest private equity firms in the business — and its co-founder David Bonderman. The San Francisco firm has more than $70 billion in assets under management.
However, it is not well-known that the firm also has been managing a hedge fund, TPG Public Equity Partners, since September 2013. And the long-short fund, which closed to new investors at the end of 2015 at $1.3 billion, has been a standout performer. (TPG Public Equity Partners should not be confused with the much larger TPG-Axon Capital Management hedge fund firm, headed by Dinakar Singh.)
Last year TPG Public Equity Partners gained 9.8 percent, making it one of the better-performing hedge funds of the year. And it has posted a 39.1 percent gain since its September 2013 inception, easily beating the Standard & Poor’s 500 stock index, which rose 31.3 percent during the same period.
The fund is headed by Alex Gleser, who was previously a health care analyst with hedge fund firm Conatus Capital Management. He had worked as an associate at Texas Pacific Group from 2002 to 2005, where he was credited with participating in several private equity deals, including Iasis Healthcare.
TPG Public Equity Partners has done a good job of maximizing gains from its long positions its first two years in operation, when the market was rising, and cashing in smartly on its short bets amid last year’s volatility and overall flat year for the markets.
In fact, last year the fund’s longs gained 5.8 percent, while its shorts rose 8.1 percent, on a gross basis. Even more impressively, in the fourth quarter, when the S&P 500 was up 7 percent, the fund made 2.3 percent on its shorts. The fund thrived last year on an average net exposure of 48 percent, according to its fourth-quarter letter, obtained by Alpha. (TPG declined to comment.)
TPG points out in the letter that two stocks especially drove performance in its long book in the fourth quarter: Autodesk and Avago/Broadcom. TPG bought both Avago Technologies and Broadcom in July. The two firms merged in February, with Avago being the acquirer. The new firm retained the Broadcom name and the AVGO ticker symbol. The hedge fund tells clients the merged company will be a “dominant and diversified semiconductor products company.” The stock is down nearly 10 percent since the deal was officially completed on January 29.
Autodesk, whose stock the hedge fund got into only back in August, is favored for its “monopoly-like position” with some of its design software products. TPG points out that the company is transitioning its sales strategy from offering perpetual licenses and maintenance contracts to a subscription model. “Our prior success investing in Adobe, another dominant software business navigating a similar business transition, spurred our interest,” the hedge fund states in its letter.The stock was among its five largest longs entering the new year.
Given the performance of some of its stocks so far during the market’s huge early-year sell-off, however, TPG is going to need its short-selling strategy to come through in a very big way.
So far this year three of five major longs are down much more than the overall market. Shares of Autodesk have already declined by about one third since year-end. Interactive Brokers Group, the automated stock-trading firm, is down 30 percent, while Verint Systems, which helps companies capture and analyze large amounts of data, is down 20 percent. Markit Group, a provider of financial information, is off nearly 10 percent. Air Products and Chemicals, which is up slightly, is the only one among the five largest longs to be in the black so far this year.
The big question is whether the shorts have fared well enough to offset these steep losses.
For example, in the fourth quarter, when the stock market was surging, two thirds of TPG’s shorts generated positive alpha, according to the firm’s letter. The three best performers each kicked in more than 50 basis points — half a percentage point — to overall returns. And the firm entered the new year short all three stocks.
Of course, TPG does not name names of stocks it shorts, except to identify the three as a company in the Asian technology, media and telecommunications sector; a bank that mostly makes residential mortgage loans; and an online company that recently went public.
And it is not publicly known which stocks TPG is now short. The letter identifies the five largest as a financial institution, a consumer retailer, an offshore services company, an online education provider and a solar manufacturer. If the solar manufacturer is SolarCity, this would be good news for investors in the fund, given that the stock is already down more than 60 percent so far this year.
This current market environment will play a big role in determining whether TPG, like more seasoned long-short funds, did a good job in its first big test.
