Taking an interest in funds of firms

“When they explained what they did it was just instantaneous to me.”

That was the response from a chief investment officer at a US pension when asked about his first encounter with a certain fund targeting minority stakes in general partners.

“Whether investors make money or not, I don’t get the impression that many asset management organisations lose money unless everything just blows up,” says the CIO, who asked not to be named. “The opportunity to share in their cashflow is pretty enticing.”

The fund in question came from Pennsylvania-based Rosemont Investment Partners, an early adopter of the model that acquires stakes of 10-15 percent in management firms  that are undergoing some sort of ownership transition.

Since that initial encounter, the US pension’s interest in the strategy of funds of firms has remained. The investor was one of several that committed to Dyal Capital Partners III, a $5.3 billion 2015-vintage targeting stakes in hedge fund and private equity fund managers.

Dyal has already secured around $1 billion of commitments for its fourth fund, for which it is targeting up to $6 billion, Private Equity International reported in October. The Neuberger Berman unit’s private equity portfolio comprises 10 asset managers including HIG Capital, EnCap Investments and Silver Lake. Its third fund had generated a 9.3 percent net internal rate of return as of March, according to data from online private equity fund marketplace Palico.

Others have joined the fray. Credit Suisse has launched Anteil Capital Partners, a sub-division that will seek to acquire “a diversified portfolio of 10 to 12 strategic minority investments in the general partnerships of alternative asset managers”, according to its website.

Goldman Sachs Asset Management is also understood to be raising at least $1.5 billion for its second Petershill fund, which will acquire stakes in hedge funds and private equity firms. Blackstone reportedly acquired a minority stake in buyout firm Leonard Green & Partners through its Strategic Capital Holdings fund, a $3.3 billion permanent capital vehicle focusing primarily on hedge fund managers.

The advantage for investors is clear. Acquiring a stake entitles them to a share of management fees and carry across all the target GP’s funds. Likewise, the deal can provide the target’s founders with much-needed liquidity without listing on the public markets. It is worth noting that many of these funds are evergreen vehicles and may pursue non-traditional means of exit.

As interest in the strategy rises, so too does deal volume. There have been at least six growth or private placement investments into private equity managers from other investment firms or funds this year, according to data from S&P Global Market Intelligence, and 2015 and 2016 each had more than double the total deals in 2014.

Such growth does not guarantee that all fund managers are open to these deals. While an investment from a fund of firms manager can help solve succession issues by freeing up liquidity, GPs are still faced with the hard decision of conceding some ownership of the company.

“From our conversations with GPs, we feel some of them are still very reluctant to have external capital in the management,” Virginie Bourel, partner and head of strategic advisory at placement agent and advisory firm Triago, tells PEl.

This mentality is evolving, she adds. “In the end, every GP will have a succession issue.”

PEI understands AlpInvest Partners is making headway with its fundraise, and at least one other global firm is also preparing to launch a fund focusing on the strategy. As Dyal’s speedy return to market shows, it is clear LPs do have appetite for funds of firms, for now.

“If we were approached by other funds, we would have to look at them,” the CIO says. “We’re not going to have a big basket full, but I’d have the appetite for a couple more managers.”