March 12, 2013
Declining-equity-3

Transaction, monitoring fees raise questions about GP-LP interest alignment

Apollo Global Management’s and TPG Capital’s Caesars Entertainment (previously Harrah’s Entertainment) investment has fallen far short of expectations. TPG Partners V and Apollo Investment Fund VI, along with a number of co-investors, acquired Caesars in 2008 at a price of $90 per share[i] or $6 billion in equity.[ii] As of March 15, 2013, Caesars had a total market capitalization of $2.1 billion.[iii]

Based on their commitments to Apollo Investment Fund VI and TPG Partners V, Apollo Global Management and TPG Capital would have invested a total of around $61 million of their own capital when the private equity firms took over Harrah’s Entertainment in 2008 ($25.8 million for TPG[iv] and $35.3 million[v] for Apollo).[vi]

At the same time, TPG and Apollo stand to collect nearly $500 million in transaction and monitoring fees from Caesars regardless of how the investment performs, raising questions about how well the private equity sponsors’ interests are aligned with those of limited partners.

Transaction, monitoring fees removed TPG’s and Apollo’s downside risk

ApolloFee3When they took Harrah’s private, TPG and Apollo collected a $200 million “transaction fee” for the deal, split evenly between the two companies.[vii]

Apollo Management had agreed to offset limited partners’ management fees with 65% of that fee income[viii], meaning Apollo would keep 35%. Assuming Apollo Management collected $35 million from the Harrah’s transaction fee, the manager would have generated a 1x return on its $35.3 million GP investment from day one.

As of the third quarter 2012, Apollo would have generated a 1.67x return on its GP investment from transaction and monitoring fees alone.

TPGFee3Assuming TPG Capital agreed to an offset Fund V limited partnersʼ management fees with 80% of that fee income (meaning TPG would keep 20%)[ix], then the manager would have collected $20 million from the Harrahʼs transaction fee, generating a 0.78X return on its $25.8 million GP investment[x] from day one and recovered its full GP investment by early 2010 with the addition on annual monitoring fees.

Under this scenario, TPG would have generated a 1.31x return on its GP investment from transaction and monitoring fees alone as of 3Q12.

From the outset, the private equity sponsors that took over Caesars may have eliminated much of their own downside risk with the $200 million transaction fee they collected from the company.

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[i] “Stockholders like Harrah’s buyout for $90 per share,” Las Vegas Review Journal, Apr. 6, 2007.

[ii] NJ Division of Gaming Enforcement report re TPG, May 28, 2008, p. 29.

[iii], NASDAQ.com, accessed Mar. 15, 2013.

[iv] Based on $300 million GP commitment, Apr. 25, 2006 report by TPG Partners V limited partner.

[v] Based of $270 million GP commitment, Apollo Global Management Form 10Q, Nov. 14, 2012.

[vi] NJ Division of Gaming Enforcement report re Apollo and TPG, May 28, 2008

[ix] Based on 2/21 conversation with TPG Partners VI LP

[x] Based on $300 million GP commitment to TPG Partners V, LACERS memo re commitment, Apr. 25, 2006.