Bradley nears first close on ‘fund of firms’

Morgan Stanley veteran Mark Bradley is likely to hold a first close on GP Interests – which will buy stakes in established private equity firms – in January 2017.

Investment banking veteran Mark Bradley is understood to be nearing a first close on his fund to buy stakes in private equity general partners. According to market sources the firm, called GP Interests, will likely hold a first close in January 2017.

The amount of the first close is currently unknown, but the target for the fund is $750 million, according to a document seen by Private Equity International. San Francisco-based Bradley, who led Morgan Stanley’s financial sponsors coverage for 12 years, first discussed the idea with investors in 2013 and launched a formal fundraising effort in late 2015.

The fund is one of a number of vehicles either in existence already or currently being planned that buys minority stakes in private equity firms as opposed to investing in their funds.

Dyal Capital Partners, a unit of asset management firm Neuberger Berman, is among the better established; it is currently in the market raising capital for its third fund, which started raising with a target of $2.5 billion – according to investor documents – is now reported to have raised more than $4 billion.

Fund of funds giant AlpInvest is understood to be building a team to invest into general partners, but has not yet begun raising a fund.

The strategy for Bradley’s vehicle, called GP Interests, is to acquire a number of minority interests in GPs and ultimately take the fund public on the London Stock Exchange. The team is in “active dialogue” with more than 25 GPs, according to the document seen by PEI. It will target firms with more than $5 billion in assets under management, a loyal base of repeat LPs and a desire to expand either geographically or in terms of product range.

The GP Interests team, which comprises Bradley and a number of senior executives from the boutique investment bank he founded with Gordon Dean and Nicholas Osborne, has previously advised on a number of the industry’s highest-profile investments in GPs. These include the sale of a minority stake in TPG to the China Development Bank, as well as the IPOs of KKR, Blackstone and Oaktree.

One of the drivers behind the investment strategy is the idea that GPs are increasingly alive to the need for permanent balance sheet capital, which can be used either to “double down” on the GP’s commitments to its own funds or to seed new strategies or product offerings. From an investor perspective, the proposition is attractive because, as it says in the GP Interests presentation, “GP economics dominate LP economics”. That is to say, owning a fee-earning portion of the firm as well as interests in its fund is better than simply being an LP in the funds, especially if one or more of the funds underperform.

Examples this year of general partners selling stakes to outside investors include Silver Lake and HIG Capital, which both sold stakes to Dyal Capital Partners, and Littlejohn & Co, which sold a stake to Goldman Sachs’ Petershill Funds unit.

The GP Interests fund will charge investors a 2 percent management fee on LP commitments and 20 percent carried interest above an 8 percent hurdle rate. Once the fund IPOs, management fees will be charged to the public entity.