Staking out opportunities
What are GP stakes and how do investors' approach them?
The concept of taking a stake in a private equity GP management company is not new, but recent years have seen more players embrace it. These deals see GPs tap investor capital in exchange for a 10% to 30% share of their business and a share of the firm’s management fees and carried interest from existing and future funds.
In 2019, there were 15 such deals, according to Investcorp figures; in 2022, there were 39 and in 2023, 30, according to figures quoted by Lincoln International. Firms that have accessed this market include Coller Capital, CVC Capital Partners, Silver Lake Partners and Vista Equity Partners.
The numbers may currently be small, but these kinds of deal have shifted from being sporadic and occasional to becoming a market in their own right, with several players, including Blue Owl Capital, Hunter Point Capital, Strategic Capital Group and Bonaccord Capital Partners all raising capital to target GP stakes opportunities.
GP stakes see GPs tap investor capital in exchange for a 10% to 30% share of their business and a share of the firm’s management fees and carried interest from existing and future funds.
And many are predicting the market will grow considerably over the next few years as GPs increasingly need capital to grow their businesses, seed new strategies, solve succession issues and find ways of making commitments to funds at a time when a slow exit environment is delaying carried interest payments.
“GPs are beginning to think of themselves as businesses for the first time,” says Avi Kalichstein, CEO of Hunter Point Capital. “Many are taking an expansive view towards product diversification. They recognise they can no longer be a serial issuer of funds and that it is challenging to retain talent unless they provide growth opportunities. This trend is driving a lot of GP stakes activity.”
Indeed, not that long ago, M&A among private equity firms was a rarity. Yet consolidation activity has picked up over the past few years as GPs have sought to expand into new areas. We’ve seen many secondaries players snapped up – Ares’ acquisition of Landmark Partners is just one example – while others have been buying infrastructure firms, such as General Atlantic’s purchase of Actis and CVC’s deal to buy DIF Capital Partners.
“M&A is on GPs’ minds today,” says Kalichstein. “LPs frequently want more than single strategy offerings. They are looking for a suite of solutions from their GPs. In turn, GPs are considering how best to scale their businesses and how they can attract the talent they need. GPs are doing this much more than they would have done 10 years ago.”
GPs are beginning to think of themselves as businesses for the first time,
So how do the investors targeting GP stakes deals look at opportunities?
“We think of a GP as being like a family business,” says Adel Alderbas, CIO at Wafra, a New York-based GP stakes firm. “Our capital can help ensure the business’s durability so that it is tied to several generations and not just an individual. Some people may see this as a financial investment, but it is a strategic investment – we partner over the long term with our GPs and we can help solve some of the issues they may face in building out their franchise.”
We think of a GP as being like a family business. Our capital can help ensure the business’s durability so that it is tied to several generations and not just an individual.
It's a point that Andrew Laurino, Senior Manging Director at Blue Owl also picks up. “We look to partner with GPs over the long term,” he says. “We increasingly need to be more than just capital providers. We need to show up after the deals to help our partners continue to be strategic in what they do.”
Some GP stakes investors also say they can help with developing new strategies. “We can help accelerate GPs’ product design,” says Ali Raissi-Dehkordy, Global Co-Head of Petershill, the GP stakes arm of Goldman Sachs Alternatives. “Our investments today go well beyond funding. We can help show a GP what a best-in-class new product like a CLO looks like, for example, because we have that knowledge in-house. We can save GPs months or years on the journey of developing their firms.”
The long-term nature of this partnership means that investors need to dig deep to understand a range of factors that might affect a GP’s future.
“When we look at a new partnership, first we have to understand how a GP’s underlying investments are going to perform,” explains Raissi-Dehkordy. “That’s because we need to understand how performance – and hence performance fees - will develop over time.”
He adds: “Today, it is especially important to understand a GP’s client base - LPs have become increasingly selective as performance bifurcates. If we’re investing to help a GP grow, we need to be comfortable around performance and that LPs will be there to support future funds. So there’s LP-level due diligence we need to do, conducting a cross-check against our own LP database to determine whether investors are active and maintaining or increasing private markets exposures.”
Alignment is another important area, given the minority stakes nature of the market. And that means considering future as well as current team members. “Our aim is to take a people business that is often focused on a few individuals and create an institutional platform,” says Laurino. “The alignment of interest needs to consider not just the people who are there today, but also the people who come through. You want there to be generational transfer.”
The GP stakes market looks set to grow further as the private equity industry increasingly matures and its reach extends into new strategies and investment themes.
And, much as private equity supports portfolio companies as they grow, professionalise and resolve succession issues, many GPs may well take their own medicine by partnering with outside investors to secure their own future success.
