What’s TPG Stock’s Long-Term Forecast and Should You Buy the IPO?

Private equity company TPG has become the first major IPO of 2022 even though business software company Justworks postponed the IPO at the last moment. While the number of IPOs hit a record high in 2021, they didn’t receive the kind of positive response from markets like we saw in 2020. What businesses is TPG into and what’s the long-term forecast for the company?

To get a sense of how poorly IPOs have performed, consider that the Renaissance IPO ETF, which has the mandate to invest in newly listed companies, is down 20.7 percent over the last year. The S&P 500 is up almost 25 percent over the period. The divergence between IPO ETF and S&P 500 explains how poorly newly listed companies have performed over the last year.

TPG Capital is a private equity company that was founded in 1992 by David Bonderman, William S. Price III, and James Coulter. Over the last decade, several private equity companies in the U.S. and globally have gone public. TPG is the latest to join the ranks of publicly traded private equity companies.

TPG manages over $109 billion worth of assets, which are distributed across five different platforms. The portfolio includes 280 active companies spread across 30 countries.

TPG has priced the IPO at $29.5 per share, which is at the midpoint of its range. This gives the private equity company a valuation of $9 billion. The company reported revenues of almost $3.9 billion in the first nine months of 2021 and most of it came from capital allocation-based income.

Thanks to a booming market, some of the companies in TPG’s portfolio went public at attractive valuations. India-based e-commerce company Nykaa deserves a special mention. TPG made a 16x return in less than three years on its investment.

TPG posted a net income attributable to controlling interests of $1.7 billion, which gives it a low single-digit PE. However, the earnings likely wouldn't be sustainable. The valuations of growth stocks have taken a massive hit and TPG might not be able to reap the same returns on portfolio companies like it did in 2020 and 2021.

TPG also listed the variable earnings and cash flows as a potential risk and said that it could lead to volatility in stock prices. Given the nature of its business, TPG stock might be volatile in the short term amid the noise over rate hikes. However, if you can be patient with the stock and take a long-term view, TPG looks like a good buy at the IPO price.

TPG has an attractive portfolio of investee companies including Airtel Money, Acorns, Toast, Spotify, Cushman & Wakefield, Dreambox Learning Zscaler, & Lenskart. While these companies look attractive and should deliver good returns for the respective TPG funds, the earnings eventually boil down to the market sentiments for IPOs, especially of growth companies.

If the last few months are an indication, growth names that form part of TPG’s portfolio are out of favor with markets. However, the company’s IPO price looks attractive at these prices, especially for long-term investors.