For most private equity firms, exits were not high on the agenda in H1. PE owners sold $123 billion-worth of business in the first six months of the year, representing a 47 percent decline on the same period in 2019, says consulting firm EY.

One of the ramifications of this is on carried interest; as exits slow and holding periods increase, the expectations for carry diminish… both in terms of how soon it will come and how much it will be. Apollo Global Management, for instance, expects gross realised performance fees to be “very modest over the course of 2020” as portfolio companies manage the impacts of covid-19 on their operations, per chief financial officer Martin Kelly. Indeed, 60 percent of PE professionals expect carry to decrease in value, according to a survey by Private Equity Recruitment in May. Of these, 85 percent also expect payments to be delayed.

“One consequence of the covid-19-induced collapse in asset values will be the wipe out of profit sharing for many managers,” wrote Antoine Dréan, founder and chairman of Triago, adding that those with heavy exposure to the hospitality, travel and energy sectors are likely to see permanent impairment. “Even at firms where hopes of getting back into carry are reasonable, it may take years of hard work to return to these levels.” Dréan argues this could encourage partners and junior staff to jump ship and found their own firms.

But there is another likely consequence of this carry crunch: a spike in PE firms selling off minority stakes to raise cash.

In an analyst note published in July on the GP stakes competitive landscape, PitchBook writes that mid-market firms (those that have raised between $2 billion and $8 billion in the past decade) could be more compelled to take on outside financing to help them bridge the gap between delayed carry and the need to commit to new funds.

The market for GP interests has grown in the last few years, with a handful of managers successfully raising funds to invest in other PE franchises. The latest firm to enter the space in the mid-market is RidgeLake Partners, a partnership between alternatives manager PA Capital and RDV Corporation affiliate Ottawa Avenue Private Capital.

Speaking to Private Equity International about mid-market firms’ need for such a cash injection, OAPC’s Michael Lunt says the capital could be used for all growth capital purposes, including helping fund the GP commitment.

With plenty of capital in the hands of GP stakes managers and a growing acceptance of the benefits of taking on outside support, we expect this to be an active segment of the market.