Bain, TPG Go Long in Major Push into Public Equities

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Bain Capital and TPG have rolled out new vehicles focused on long-hold public equities – aiming for billions of dollars in new capital and further blurring the lines between the public and private equity markets.

Bain’s new Public Equity Global Long Equity Fund and TPG’s Public Equity Partners Long Opportunities strategy – both registered as hedge funds last year with the Securities and Exchange Commission – are expanding on existing hedge business lines at each firm, but are going after investments intended as long holds. TPG also is launching a new Strategic Capital Fund that will buy minority stakes in public companies, according to a Bloomberg News report.

Private equity investors haven’t been clamoring for their managers to spread into the hedge fund and long-only markets, says Alan Kosan, senior v.p. and head of alpha investment research at Segal Marco Advisors. But there clearly is further convergence as big asset managers focused on the public or private equity markets march into the other’s turf, he says.

“We will see more private equity firms invest in public equities, and more [traditional long-only] public equities managers investing in private equity,” he says. “It’s hard to say it’s a bigger trend at this point, though we see more firms confident that they can execute in new [sectors]… and it’s likely to happen more in the future. But we haven’t seen a lot of traction yet from [investors] following a manager on the private side into the public side.”

Bain’s open-end fund had sold about $23.5 million when the manager first registered it with the SEC in October, but is targeting $5 billion to $7 billion for the vehicle at full capacity, according to Bloomberg. The filing lists Joshua Ross, a managing director on the public equity team who joined Bain in 2016 from Och-Ziff Capital Management, as the new fund’s lead investment principal.

TPG’s long opportunities fund, first registered with the SEC in May 2019, had raised $1.2 billion, according to updated filings in late December. It is part of the TPG Public Equity Partners (TPEP) division, which in its last Form ADV filing in March 2019 presaged the launch, noting “we expect to form ‘long only’ investment vehicles that only hold long positions in the public equity securities included in other TPEP Funds’ long portfolios.” The ADV also noted that its TPEP funds “have a broad mandate to invest in publicly traded equities globally across all sectors and market capitalizations.”

TPG’s strategic capital fund, which is not part of the TPEP group, will aim to build minority positions of at least 5% in large companies, with a goal of gaining board seats and playing a constructive activist role on corporate governance and environmental matters.

Other private equity managers have made their own forays into public equities investing in recent years, including Apollo Global Management,

which has built a $7 billon total return fund, and Providence Equity Partners, which last year launched a new hedge fund strategy.

It’s not a big leap for buyout managers to believe they can translate their private company research techniques into the public equity sector, and some have been doing so for years, Kosan says. While public equities managers often look at earnings per share and top line revenue growth data, and private equity shops focus on EBITDA growth and multiple expansion, there are “commonalities” in that both are vetting management teams, business plans, sector dynamics, and individual company positioning, he says.

“You see why [private fund managers] want to export their knowledge of company sectors and valuations into the public domain,” he says. “At the end of the day, the target is if the company can grow revenue or earnings or profits. It’s about identifying companies that are competitive and have the potential to grow the top line and bottom line.”

The moves also reflect the larger trend of big private equity managers spreading into other asset classes, especially with real estate, private debt, and hedge fund strategies, says Alan Pardee, a managing partner at Mercury Capital Advisors, a placement agent.

“We certainly have seen more product proliferation at the large private equity firms,” he says. “The bigger the firm is, the more product they have.”

Larger private equity managers may have an edge in such crossover efforts, because they can build a deeper team to work on new funds, Pardee says. “People are going to trust the big platforms to do something interesting, whereas a smaller manager might find it a tougher thing to accomplish,” he says.

But investors still naturally hesitate to embrace alts manager moves into other asset classes, Pardee says. “[Limited partners] are generally uncomfortable with hedge funds launching private equity funds and private equity funds launching hedge funds,” he says.

Investors will likely question whether any buyout manager launching a public equities product has established the proper investment process, shows an adequate level of commitment to a new investing mode, and has built up sufficient staff for the function, Kosan says. It may take a lot to convince investors to not simply award their public equities mandates to the traditional managers in that market, he says.

“It’s up to the private equity firm to make the case it has the expertise,” he says. “The backdrop here is the search for active management capabilities. There can be some appeal if it’s crafted appropriately with the right sponsorship and the right thesis.”

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