The rise of GP stakes investing

Private equity firms, which have gained significant attention for their involvement in purchasing and selling ownership stakes in companies, tend to overshadow the fact that these firms themselves can be subject to acquisitions and sales.

During the early 2000s, when Rosemont Investment Group spearheaded the strategy of acquiring minority stakes in asset and wealth managers, there were no other firms investing in GP stakes via a fund model.

Over time, the market has grown, and now there are at least a dozen of firms involved in this practice called GP stakes – Laurent Capolaghi, Partner, Private Equity Leader and Vincent Remy, Partner, Private Debt Leader delve deeper into the GP stakes investing landscape as well as the benefits for both General Partners (GPs) and Limited Partners (LPs).

Empowering General Partners

As the private equity industry reaches a certain level of maturity and the challenging economic context persists, the consolidation of the industry is unfolding. The race for scale is underway, and mid-sized private equity managers are struggling to raise their latest funds due to rising interest rates and the denominator effect on LP portfolios. Consequently, there is a steady surge in demand for GP stakes, but what advantages do they offer to the GPs?

The primary and most obvious benefit to an asset manager of selling a minority stake is the injection of liquidity into the business, providing several advantages.

First, it strengthens the balance sheet, enabling the asset manager to meet ongoing operational requirements such as investing in strategic hires, infrastructure, and technology. Secondly, it allows the asset manager to scale up by seeding new strategies or exploring new business lines. Additionally, the liquidity gained from the sale can fund GP commitments as the number and size of their funds increase. Furthermore, selling a minority stake helps capitalize on the ownership structure to execute succession plans. This ensures continuity and incentivizes the next generation of talent while allowing founders to exit.

A GP stakes investor, despite being a minority shareholder, adds strategic value to an asset management firm in multiple ways. Their operational expertise and specialized knowledge support back-office operations such as marketing, business strategy, and regulatory compliance. Additionally, they mediate the GP/LP relationship, offering a professional perspective to meet changing LP demands, from fee reporting to ESG implementation. Furthermore, they can assist with fundraising by leveraging their reputation, market knowledge, and network to attract new capital and open distribution channels. Overall, the strategic value of a GP stakes investor extends beyond their ownership stake, benefiting the firm's operations, relationships, and growth.

Benefits for the investor

Investing in GP stakes offers unique opportunities for investors, providing returns through various avenues. First, investors gain a pro-rata share of the GP's commitment to the underlying funds, allowing them to participate in the performance of these investments. Additionally, investors receive a portion of the management fees generated by the asset manager, providing a stable and regular income stream.

Furthermore, investors have the potential to benefit from the appreciation in the value of their equity stake as the GP's own business grows. They can also participate in the GP's carried interest in its underlying funds, sharing in the profits generated by successful investments.

From a strategic perspective, investing in GP stakes brings additional benefits – investors enjoy improved relationships with GPs, gaining oversight in both corporate and fund governance, as well as privileged access to the GP's investment and operational talent. This enhanced relationship and access provide valuable insights into the GP's investing methodology and process.

Investing in GP stakes also offers portfolio diversification for investors. By adding GP stakes to their investment portfolio, investors gain exposure to a different asset class and can potentially mitigate risks associated with other investments.

Finally, it is worth noting that when general partners raise subsequent funds, there is typically an increase in the average fund size. This expansion amplifies the income streams, comprising fees and carried interest, that GP stakes investors have invested in, thereby further augmenting their potential returns.

Major players in the game

The idea of GP staking originated in the 1980s, primarily involving institutional investors who purchased individual stakes in private equity managers with strategic intentions. In the late 2000s, a formalized industry emerged with dedicated GP stakes firms. While these firms initially focused on hedge funds, the strategy expanded to include various alternative assets, particularly private equity, private credit, and real estate. Established market participants with strong relationships and credibility have been successful in executing this strategy, often connected to banks or large alternative asset managers.

Historically, GP stakes investments on the selling side were restricted to managers who had established a successful history. Nonetheless, the increasing availability of capital for GP stakes specialists is broadening the range of potential contenders.  On the buy side, the largest fund exclusively dedicated to GP stakes ever raised closed in 2019, with over 9 billion US dollar.

The trend of GP stakes investing has predominantly been embraced by North American investors. However, there is a growing appetite for these investment opportunities in Europe as well – recent developments indicate that new players have started exploring the European market for such stakes with for example the French fund Armen, one of Europe's rising players, which recently achieved a significant milestone by closing its inaugural fund at EUR 150 million. This fund aims to make 12-15 investments in GPs with assets under management reaching up to EUR 10 billion.

Simultaneously, UK-based GP House and a new division of AXA Investment Managers are actively preparing to engage in similar deals, indicating a growing momentum behind this trend in Europe. ¹These firms recognize the potential for substantial returns in the European GP stakes space and are positioning themselves accordingly.

Is 2023 poised for a potential surge in GP Stakes amidst a sluggish fundraising environment?

In light of the potential slowdown in fundraising activities anticipated for 2023, private equity firms may explore alternatives to raise capital. One such method gaining traction is the sale of a general partner stake². By selling a minority ownership interest to an investor with a solid reputation and proven track record, PE firms can effectively generate investor interest and secure capital commitments for future funds. The presence of a GP stakeholder offers the firm enhanced opportunities to tap into unexplored distribution channels and diverse capital sources, proving particularly advantageous for smaller and emerging managers who face inherent challenges in the current fundraising landscape.

The dominance of the largest PE players in fundraising during 2022 cannot be overlooked. Limited partners encountered capital constraints, prompting them to gravitate towards larger, well-established managers³. This dichotomy between mega-funds and smaller firms also extends to GP stakes. Notably, Blue Owl⁴, a prominent player, typically acquires stakes in larger firms. Their Fund V, for instance, has invested in 17 firms to date, such as CVC Capital Partners ($148 billion in assets under management), PAI Partners ($28.5 billion), and H.I.G. Capital ($53 billion in assets under management).

However, the overall downturn experienced by the PE market in late 2022 also impacted deals involving GP stakes. According to PitchBook data, the total count of GP stakes transactions declined from 29 deals (with a total deal value of $2.2 billion) in 2021 to 17 deals (with a total value of $1 billion) in 2022⁵:

When it comes to GP stakes investing, there are several challenges and concerns that need to be addressed. One common issue raised by PE firms that are publicly traded is the lack of understanding among traditional equity investors regarding the accurate valuation of their business. This often results in the continuous undervaluation of these firms.

Moreover, the highly specialized nature of GP stakes investing implies that only a limited number of well-capitalized managers can actively participate in this strategy, further adding to the concerns and challenges associated with this investment approach.

[1] IoN analytics, « Slice of pie: New entrants gobble up GP stakes in Europe » (April 2023)

[2] Pitchbook – GP stakes gain traction as fundraising slows (January 2023)

[3] Pitchbook – GP stakes gain traction as fundraising slows (January 2023)

[4] Blue Owl – Blue Owl Capital Inc. Announces $12.9 Billion Final Close for Dyal Capital Partners V - Blue Owl

[5] Pitchbook – GP stakes gain traction as fundraising slows (January 2023)