Private equity industry lessons, outlook from Jonathan Coslet of TPG

Jonathan Coslet, chief investment officer of the $70 billion private-equity behemoth TPG Capital, has been at the firm since its founding in 1993.

He's been a crucial driving force behind TPG's growth into one of the world's 10 biggest private-equity firms.

As part of a panel discussion at the recent Milken Institute Global Conference, Coslet explained why the rise of companies like Amazon and Uber have forced him to change his entire strategy.

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You have to adapt to survive, even at the highest levels of finance.

It's a quandary that's faced many a successful investor as they try to stretch their outperformance across multiple decades.

Those struggling to figure out what's next will find comfort in the fact that Jonathan Coslet — chief investment officer of the $70 billion private-equity behemoth TPG Capital — has found himself at a similar crossroads during the past 10 years.

Coslet has been at TPG since it was founded in 1993, and he readily admits the landscape has changed immeasurably over the ensuing period.

“We have all lived through the greatest anomaly in asset value pricing, ever,” Coslet told a crowded room of attendees at the recent Milken Institute Global Conference. “As good of investors as we may all be, there has never been a time when interest rates have gone from 12% to 2%.”

He continued: “That's been a tailwind that's helped us all. That's now pretty much over.”

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Luckily for Coslet, he's made a career out of identifying and taking advantage of such shifts. The process of doing so is arguably the focal point of his investing strategy.

“When we're in an environment like we're in today — where everyone is complacent, and everyone thinks the 10-year cycle will become a 15- to 20-year cycle — I'm trying to think about where I'm going to see inflections,” he said. “Today, the inflections are mostly driven by disruption, technology, demographic and social changes, and science and medical changes.”

It was around this time that the panel's moderator — Michael Milken himself — asked the multibillion-dollar question: What are you invested in today that you wouldn't have been previously？ And what changed your mind？

Coslet's response aligned perfectly with the change in approach he'd outlined. Fully recognizing the shifts in the landscape, he responded that he's built a much higher tolerance for unprofitable companies. He even cited two of the most popular modern examples of such firms.

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“Every once in a while we're finding a company where their business model advantage is that they're willing to lose more money than anyone else — at least for a while,” Coslet said. “That's a very dangerous thing.”

He continued: “But we have an example in Amazon, and we have an example, perhaps, in Uber. It will be a $100 billion company willing to lose more money than anyone else. That's really scary. We would've never done that 27 years ago.”

But it's ultimately worth it in the cases where Coslet sees companies with a highly disruptive business models and “true competitive differentiation” within large markets. Those qualifications form another pillar of his overall investing approach.

Such companies also meet one additional piece of Coslet's methodology: They can be relied upon for secular growth that's largely insulated from business-cycle fluctuations. It's ultimately led to a situation where Coslet is doing something that was previously unthinkable.

“This is the one situation where I can say I would've never thought about that as something I could get behind,” Coslet said.

He continued: “But if you have the wherewithal to weather the storm, as Amazon has, and as Uber looks prepared to do, that's the one place that I might invest differently today — in addition to real science, real technology, real disruption, and real growth.”