GP stakes are buzzing, but LP worries remain

GP stakes funds are targeting nearly three times 2019’s record fundraising haul, but the lack of predictability around exits may be keeping LPs from embracing the strategy.

Almost a quarter of LPs have invested in at least one GP stakes fund, according to Private Equity International’s LP Perspectives 2022 Study. However, most investors (60 percent) have no plans to invest in GP stakes funds. While slightly lower than last year, when 67 percent of investors had no plans to invest in these funds, concerns around exits and conflicts of interest remain at the forefront of LPs’ minds, despite the recent surge in investment activity.

Investcorp, the $37.6 billion global investment manager, in early November acquired at least its third GP stake in Artemis Real Estate Partners through its Strategic Capital Group, which was launched in 2019 to invest in midsize managers.

At the top of the market, Blackstone said in October that it expects to hold a final close in Q4 2021 for its most recent vehicle, Blackstone Strategic Capital Holdings II, at approximately $5.5 billion. Meanwhile, Goldman Sachs Asset Management’s Petershill unit is seeking $4 billion for its fourth fund, and Blue Owl Capital – the firm resulting from a merger between Dyal Capital Partners and Owl Rock Capital earlier this year – is seeking $5 billion for Dyal Capital Partners V.

In the second half of 2021, Blackstone acquired stakes in Boston-headquartered Great Hill Partners, Chicago-headquartered GTCR and mid-market firm Sentinel Capital Partners. Blue Owl, which already owns stakes in firms including Platinum Equity, Vista Equity Partners and Silver Lake, is considering buying a piece of CVC Capital Partners, PEI reported in August. If it closes, the acquisition would be one of the most high-profile GP interest sales in recent years.

Morgan Stanley Investment Management, Aberdeen Standard Investments, Wafra, Stonyrock Partners and Goodhart Partners are some of the other groups to have entered the fray.

As of May, GP stakes funds in market were targeting $24.45 billion, according to PitchBook. The best fundraising year on record was 2019, when just $9.4 billion was raised.

LP concerns ‘overblown’

Despite the historically elevated – and still growing – activity in GP stakes, LP concerns could be preventing many from embracing the opportunity. Just 13 percent of investors are not at all concerned about the lack of predictability around exits for GP stakes funds; 41 percent of investors are very concerned.

“I believe these concerns are significantly overblown,” Joseph Lombardo, head of private equity GP advisory at Houlihan Lokey, tells PEI, noting there is always a market for high-quality, yielding assets.

“Similar to many venture capital investments and growth equity investments, GP stakes are minority non-controlling investments in private companies,” says Lombardo. “Accordingly, managers of GP stake funds have a number of paths they can pursue to create liquidity for their LPs.”

In September, Goldman Sachs’ Petershill unit listed a portfolio of 19 GP stakes on the London Stock Exchange, which provided an opportunity for LPs in the Petershill funds II and III to realise cash returns.

In June 2020, Dyal (now Blue Owl) securitised the management fees of 10 GPs in its 2015-vintage Fund III by bundling up their future cashflows and syndicating them among 20 investors in a $1 billion deal and carried out a similar process on Fund IV, PEI understands. Petershill did a similar securitisation in 2019.

Bennett Goodman, one third of the founding partners behind GSO Partners (now Blackstone Credit), is reportedly seeking $2.5 billion for his Hunter Point Capital’s debut fund that will target mid-market managers. The firm is planning to offer liquidity through an arrangement with Nasdaq Private Market.

Investcorp does not plan to hold its investments perpetually; rather, it has a finite timeline. Once the team accomplishes all it can through its partnership with the GP, it will help the firm find a new owner of the equity.

That’s not all. According to Lombardo, GP stake investors could be dragged out if the GP sells a majority of its firm to a control buyer. GP stakes funds can access the continuation vehicle market, pursue dividend recaps or even securitise their portfolios. And, as is the case for most private equity funds, LPs in these funds can tap the secondaries market to sell their interests.

This is to say nothing of the potential conflicts of interest, which more than 80 percent of investors are at least somewhat concerned about. For the most part, timely, sensitive, specific, actionable deal information is not shared between a GP and its GP stake partner, according to Lombardo.

GPs running these strategies are unlikely to be able to tap institutional capital at scale to take down the growing opportunity for GP stakes until they can articulate and address institutional investor hesitation.