What is GP stakes investing?

GP stakes strategies are unique because they offer significant yield components, diversified downside coverage and benefits when the underlying businesses perform well. This blog post focuses GPs Investment Landscape. It answers questions about construction, allocation as well as GP and LP Benefits.

What is a GP stakes capital investment?

GP stakes are direct equity investments which represent a minority of ownership in a GP’s underlying business management company. Typically, LP’s ownership is passive, not-strategic or non-voting. Alternative fund managers, who prefer closed-end to open-end funds, can make these types of investments.

The quarter ending in 2021 saw a record amount of fundraising activity. More than $20 billion was raised across GP stakes funding. As more LPs obtain their first allocations, and GPs begin to consider selling an equity stake, the strategy has become a well-established practice in PE.

What are the market factors that drive GP stake-investing?

High yield components drive GP stakes investing. In mature portfolios LP returns can rise to the mid-teens with a growth rate of between 7% and 10%. PE funds can multiply by three times their original size in a decade. This increases firm multiples and provides substantial returns.

The GP stakes Fund structure is a ten year plus life cycle. It allows LPs the flexibility to not reallocate to new funds, allowing them to maintain target distribution. In addition, the annual management fee paid by capital firms provides significant protection. Carried interest is a potential source of upside growth and is dependent on fund performance. In other words, stake investments will still recover 70%- 90% of their original cost if the firm sells it and doesn’t raise another fund.

FAQ

Here’s a list of frequently asked questions on GP stakes and investing. Is there a question that you don’t see answered here? Drop it in a Comment and we’ll make an effort to include it in future updates.


Do GPs choose open-end or close-end funds when they are involved in stake investment?

Open-end fund strategies, such as hedge funds or long equity strategies, are those that have periodic redemptions. Closed funds, in contrast, are investment vehicles not subject to investor redemptions (e.g. buyout funds and private credit).

Currently major GP stakes investor tends primarily towards GPs with closed-end funds. But preferences have changed. At first, most activity involved investments made in closed end funds (specifically hedge fund) with mixed results. Today, closed-end funds are the preferred choice for most firms. For instance, Dyal Capital Partners transactions have included closed end GPs since 2016, while AIMS doesn’t invest in open-end funds since 2015. Find out more about each of these groups.


What kinds of firms usually receive this type investment?

Firms that receive GP stakes investment are typically high performers with a proven track. A firm that received GPs investments has an average capital of $23.4B. This is compared to a non GPs investment average of $1B. This includes managers with diverse strategies –ranging from energy, real estate, credit and other secondary activities. External investors prefer firms with growing assets under their management.


Who’s the biggest player in GP stakes investors?


Blackstone

A multinational PE firm that specializes is leveraged buyouts (including public-to-private and add-on transaction), restructurings, and private placement funding. The firm has a diverse client base, including the technology, financial, and insurance industries. The firm was created in 1985. New York is the headquarters. There are additional offices located in Europe Middle East Asia, Australia, Asia and Europe.


Dyal Capital Partners

DyalCapital Partners works to acquire minority equity shares in alternative asset management companies, which are geographically and strategially diversified. Dyal Capital Partners, which was founded in 2012, holds GP stakes at more than 40 investors. merged in 2021 with Owl Rock Capital by a SPAC megadeal.


Goldman Sachs Alternative Investments & Manager Selection Groups

Goldman Sachs Alternative Investments & Manager Selection Group, is an investor in private-equity funds. The firm provides fund management and liquidity to existing PE investors through the secondary market. The firm’s global PE program focuses on creating diversified PE portfolios. It takes into account each investment’s strategy. Geographic focus, competitive advantages, return profiles, and how they might impact the portfolio’s volatility.


Why would a GP stake holder be interested?

The recipient management company can sell a minority stake to generate liquidity that will be used to finance new business initiatives and build value. GPs are also able to take advantage of the expertise and specialized knowledge that an LP has in operations.


Would an LP be interested?

LPs are entitled to a larger number of top-performing managers, as part of future management fees, and the potential to appreciate their equity stake.


What types LPs usually participate in GP stakes investors?

Most LPs that commit to GP stake funds are well-established Affiliated managers Group (AMG), and large LPs including the Alaska Permanent Fund Corporation.


What important factors do GP stake holders consider before they invest?

GP stakes investment will inspect a firm’s operations from every angle before they make an investment. This includes analyzing every aspect of a company’s business, including LP/GP relationships and alignments in incentives. It also helps to understand the nuances of how GP management companies generate revenue. It is also crucial to assess the sustainability of future revenue streams for the management company.


Where are GP stakes located within a private capital portfolio?

Although strategies can differ, GP stakes investments are often made in a portfolio of growth equity, which is designed for large and mid-cap stock returns at a lower cost to LPs. Equity growth firms invest in high performing, late-stage companies for their continued development.


What is the best way to avoid investing in GP stakes?

Publicly traded PE firms complain that traditional equity investor don’t know the right way to value their company, leading to persistent undervaluation.

The investor side has concerns that the manager receiving a GP investment may alter their strategy to maximize the income of the management company at expense of underlying investors.

Furthermore, this strategy is extremely specialized. This could make it difficult to find enough managers with deep pockets.

Learn more about GP stakesInvesting


Listen to the 30-minute podcast episode

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In Visible Capital – The evolution of GP stakes


Check out these questions to ask before, during and after a GP stakes partnerships

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PitchBook Analyst Note: Choosing a GP Stakes Partner


The rise in GP stakes deal does not necessarily translate into a decrease of opportunities

Download our

PitchBook Analyst Note: GP Stakes Deployment Opportunities

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