Calculated Diversification And Climate Investments Propel Future Revenue And Margin Growth

Key Takeaways

• TPG's focus on climate investing and expanding its Impact platform demonstrates a strategic move towards growing market segments, potentially enlarging the revenue base.
  
• Diversification into infrastructure and a robust fundraising momentum, particularly in the Rise Climate franchise, hint at an expanded source of fees and improved margins.
  
• TPG's growth and revenue are at risk from market volatility, integration challenges from acquisitions, intense sector competition, reliance on fundraising, and global expansion risks.

Catalysts

Operates as an alternative asset manager in the United States and internationally.

• The significant momentum in capital raises, especially in credit strategies, indicates a strong future inflow of fee-earning assets, which is expected to boost revenue growth as these funds are deployed.
  
• The active pace of deployment and differentiated deal sourcing across private equity, credit, and real estate platforms suggests a strategic allocation of capital that can lead to higher returns, positively impacting earnings.
  
• The expansion into climate investing and the rise of the Impact platform, with an expected $35 billion of AUM within 2 years, shows a forward-looking approach to tapping into growing market segments, likely increasing the revenue base.
  
• Anticipation of a robust fundraising momentum continued led by the Rise Climate franchise and plans for raising significant capital across new and ongoing funds, indicating potential for substantial growth in fee-earning AUM and subsequent revenue enhancement.
  
• The strategic partnership and expansion into infrastructure indicate a diversification of investment strategies, which can lead to an expanded source of fees and enhanced margins over the medium to long term.

Assumptions

• Analysts are assuming TPG's revenue will decrease by -3.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.6% today to 21.3% in 3 years time.
• Analysts expect earnings to reach $517.0 million (and earnings per share of $3.6) by about September 2027, up from $16.7 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 70.1x on those 2027 earnings, down from 299.7x today. This future PE is greater than the current PE for the US Capital Markets industry at 20.6x.
• Analysts expect the number of shares outstanding to grow by 17.99% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.6%, as per the Simply Wall St company report.

Risks

• The reliance on market conditions for optimal fund deployment might negatively impact revenue if economic volatility persists, potentially leading to lower-than-expected returns on investments.
  
• The firm's substantial growth through acquisitions, such as Angelo Gordon, introduces integration risks which could affect operational efficiency and ultimately net margins if not managed effectively.
  
• Significant competition in the climate and real estate investment sectors could pressure the firm to accept lower returns, impacting net margins if TPG cannot differentiate its offerings effectively.
  
• A large portion of TPG's growth strategy is predicated on successful fundraising activities; a failure to meet fundraising targets, especially for new strategies like Rise Climate, could impede revenue growth.
  
• The global expansion and diversification of TPG's investor base, especially in credit strategies, introduces foreign exchange and regulatory risks which could affect earnings if the firm fails to manage these effectively.

Valuation

• The analysts have a consensus price target of $49.92 for TPG based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $63.0, and the most bearish reporting a price target of just $43.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.4 billion, earnings will come to $517.0 million, and it would be trading on a PE ratio of 70.1x, assuming you use a discount rate of 6.6%.
• Given the current share price of $48.74, the analyst's price target of $49.92 is 2.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.