GP stakes investing are direct equity investments representing a minority ownership position in a GP’s underlying management company. According to Pitchbook, fundraising activity surged in the last quarter of 2021, with over $20 billion raised across GP stakes funds.
The GP stake investing strategy represents a bet on the future growth and profitability of the investment firm behind the fund. It has grown more popular in recent years because it gives the investor a share of returns from what may be multiple funds and accounts managed by the firm. Therefore, it gives the advantage of diversification – rather than just the income and gains from one of those funds.
Asset managers are “people businesses,” reliant on fairly mobile human capital. Moreover, asset managers preserve the firm’s culture and compensation dynamics to maintain its long-term sustainability. Limiting outside investment to a minority stake allows the GP’s senior executives to maintain decision-making autonomy without disrupting the team or culture. Meanwhile, they benefit from a partnership with the outside investor that adds value to its balance sheet and business plan.
Before investing, GP stakes investors will examine a firm’s business from every angle. That includes analyzing everything from LP-GP relationships and alignment of incentives to understanding how the GP management company generates revenue.
GP stakes investors – the top players
At the heart of GP stakes investing, a select group of firms has continued to push things forward. These active GP stakes investors were relatively early adopters of the strategy, and they remain heavily involved in shaping things today.
The market continues to be dominated by three major investors: Blackstone Alternative Asset Management, Dyal Capital Partners and Goldman Sachs Alternative Investments & Manager Selection Group. According to a recent Pitchbook report, each of them has raised funds over US$4 billion dedicated almost exclusively to this strategy. At the end of 2019, Dyal ramped up the stakes by closing its fourth fund with more than US$9 billion in the capital, making it the largest GP stakes fund ever raised.
Newcomers appear more often, with many trying to distinguish themselves through their deal structuring or targeting firms at earlier stages of development. For example, Sixpoint Partners has generated a “private equity seeding platform” with a $200 million fund. The strategy focuses on spinout managers, and the structure deals with a specified path to exit. Another newcomer is Hartford HealthCare, the $4 billion fund for diverse managers. The fund has a different model than a typical GP-stakes investment. In addition to buying stakes in investment managers, the firm plans to be an active owner that will help guide the managers as their funds grow.
What is next in the making for GPs?
Now that some of the largest GP stakes managers we mentioned above have gone public, allocators are putting money into funds that invest in smaller private equity and alternatives firms. According to Institutional Investor, Dyal Capital Partners merged with Owl Rock Capital Group and went public in May. Dyal is the GP-stakes subsidiary of the combined company called Blue Owl. Petershill, a subsidiary of Goldman Sachs, launched in 2007, was listed in London in September. Both aspired out large GPs for their portfolios.
In contrast, Investcorp Strategic Capital is looking to invest between $50 to $100 million-plus in GPs at an “inflexion point of growth,” according to the source.
In the meantime, asset managers find themselves in greater need of capital – to meet their existing GP commitment obligations and for a number of other reasons. With some of the largest asset managers already having sold stakes in their firms, demand in this particular market is exceeding supply, which opens the way for emerging managers, middle-market PE firms and spinouts.