‘GP Currency’ has never been more valuable, or so useful

High-value stakes in private equity firms are increasingly easy to convert into equity and debt, driving firm expansion, own-fund investment and more, write Victor Quiroga and Antoine Dréan of Triago.

One of Triago’s 10 Outrageous predictions for private equity in 2021 forecast that Blackstone would reunite with coveted former unit BlackRock – spun out decades earlier – through a stock market takeover.

What was outrageous about this? Blackstone, as a private equity investor, was much smaller than BlackRock; the latter quickly grew bigger than its former parent by focusing on the much larger public equity markets. BlackRock’s assets under management were 16 times that of Blackstone’s in early 2021 and today they are still 11 times larger. But the forecast assumed, not really so outrageously, that Blackstone’s public market capitalisation – $74 billion in January 2021 – would soar above BlackRock’s $111 billion market capitalisation. The foundation for this was the rising premium investors were paying for stakes in private equity managers, at a time when traditional stock market managers were becoming increasingly dependent on low margin index investing.

Fast forward 14 months, and what once seemed implausible no longer is. Valued a third less than BlackRock, Blackstone is now worth a third more – their respective market capitalisations are $105 billion and $139 billion (as at 4 March 2022). That’s just one indication of the dramatic re-rating of private equity firm value in recent years. As that value rises, its potential to drive deals, diversification, staff recruitment, talent retention, skin-in-the-game fund investment, restructuring and even the launch of newly independent PE groups, grows.

Options for converting ‘GP currency’ – shorthand for the fungibility of general partner stakes – have multiplied in the past three years. An increasingly diverse swathe of capital providers are looking to benefit from the robust growth of private equity firms, much as stock market investors do, reassured by capital commitments that are locked up for years and by the exceptionally high, sticky profit margins that characterise credible active management.

These players include a rapidly rising number of banks, some 30 today versus half-a-dozen three years ago; a growing universe of private credit fund sponsors such as Ares Management; new, highly focused credit and equity operations at private equity mega-firms such as Blackstone; major secondary players like AlpInvest Partners; preferred equity providers, like Whitehorse Liquidity Partners, whose cash piles are growing faster than investment opportunities in the secondary markets they traditionally focused on; and even insurers looking to invest never used covid-19 reserves.

All of these groups have joined the ranks of GP stake funds, which in turn, have grown relentlessly since 2014 when the most high profile of these vehicles, Dyal Capital Partners, turned from taking stakes in hedge fund groups to investing in private equity firms.

And there’s a cherry on the cake for those converting GP currency. The highly competitive choice of conversion options means that capital suppliers increasingly must offer more to succeed. Equity capital providers now typically accompany cash injections into GP firms with help meeting new LPs, headhunting top talent and even negotiating better office leases. Debt and preferred equity now comes at annual costs that are some 200 basis points below the levels of three years ago – real or effective interest rates that continue to fall even though most rates are rising. In short, there has never been a better time to convert GP currency into new strategic opportunities.

Victor Quiroga is a founding partner and Antoine Dréan is chairman of Triago, a placement agent and advisory firm.