When Rosemont Investment Group helped pioneer the strategy of acquiring minority stakes in asset and wealth managers at the turn of the millennium, there were no other firms investing in GP stakes via a fund model.
Today, the market has grown to at least a dozen main firms. The largest of these – Dyal Capital Partners, now part of Blue Owl – is investing its $12.9 billion latest fund.
GP stakes buyers vary by size and sector specialisation. Strategic buyers such as conglomerates also acquire minority interests in alternative firms on an opportunistic basis.
There are multiple reasons why a GP may want to sell a minority stake. One is to manage shareholder liquidity, such as cashing out a retiring partner. Another is to generate proceeds to fund growth plans, such as adding a new business line like private credit, or opening offices in new markets.
GPs can even sell minority stakes to help finance their GP commitment, as secondaries firm Coller Capital did last week via its partnership with Hunter Point Capital. This driver becomes even more acute as funds step up in size, as individuals at investment firms may not have capital readily available to fund their GP commitment.
In a challenging fundraising environment, striking a strategic partnership with a firm that is perceived as being able to help with fundraising – either by providing LP capital itself, or from its wider platform, or by helping with introductions to other LPs – can be a large differentiator. This can include providing access to new forms of capital, such as retail and wealth management channels.
“In the GP stakes world, different people offer different things,” says Thomas Liaudet, global head of GP Capital Advisory at Campbell Lutyens. “Some people offer LP capital, some don’t. Some offer very global footprints and knowledge and some don’t. Some offer quite visible, well-known brands, some are unknown. The GP has to think, okay, so what do I want actually? What’s my priority? That drives and who might be the best partner, outside of the [size of the] capital and the valuation.”
When it comes to selecting GP stakes partner, how can an investment firm differentiate one potential partner’s capital from another? What will partnering with one firm bring that partnering with another firm won’t bring?
The first step is to figure out the size of the stake a firm wants to sell and the approximate dollar value of that stake. Typically, only the largest GP stakes buyers such as Blue Owl, Blackstone and Petershill will be able to back a partnership that requires $500 million to $1 billion or more in equity. Debt is not typically used in GP stakes transactions, market sources tell us.
After size of transaction, the other main parameters GPs will consider are the existing relationships the GP stakes firm has; the perceived strategic benefits the GP will gain from selling a minority stake; and social fit.
In our conversations with multiple GP stakes participants, valuation appears to not be a driving factor between why a firm may choose one GP stakes buyer over another.
“It’s never really all about the economics,” says Saul Goodman, head of Evercore’s global alternative asset management practice, who adds that in about half of the transactions his bank has advised on, the client will choose to sell to a partner who wasn’t the highest bidder. Rather, the winning firm had a better social fit, or existing relationships with people at the firm, or stronger perceived strategic benefits. Such benefits could include being accretive to fundraising, helping with the launch a new product, advising on a retail strategy, ESG matters, generational transfers, HR matters, procurement savings or best practices, among others, he adds.
“Many times there is already an existing relationship as the GP Stakes firms have broad networks and some are part of larger institutions or the principals were prior. The GPs care about the social fit with the firm and most importantly that the transaction is very LP friendly and beneficial.”
Daniel Lavon-Krein, a partner at law firm Kirkland & Ellis and who advised Coller Capital on its partnership with Hunter Point, says the validation that a brand name firm brings is highly attractive to a firm looking to sell a minority stake.
“It validates the work that the sponsor has done to-date,” Lavon-Krein tells Private Equity International. “[The top GP stakes buyers] do a meaningful diligence, deep dive diligence into your firm. So if they say, yes, we want to buy a stake, it is a validation of the work that the firm has done and of the quality of the sponsor.”
When it comes to exit strategy, GP stakes buyers appear to have a range of approaches. Some position themselves simply as permanent capital providers. Others appear to have clear exit options, including debt-financed dividend recapitalisations, single-asset sales, portfolio-level sales or public listings.
Our chart below shows how some of the major firms in GP stakes differentiate their capital and offerings. Scroll through the table below using the horizontal bar at the bottom, or download the data in Excel format here.
Why GP stakes transactions rarely fall apart
According to Daniel Lavon-Krein, a partner at law firm Kirkland & Ellis who advises on GP stakes deals, such transactions rarely fall apart due to the large amount of work that’s undertaken before a deal comes to market. Firms usually begin the process by working with a law firm to make it possible from an “infrastructure” perspective to sell a minority stake. They will typically also have been working with a financial adviser to value their management company, so they should have a strong sense of the range of potential outcomes. Finally, as GP stakes sales are often conducted via an auction process, firms will typically go out with a very detailed term sheet and a strong understanding of who the potential counterparties are.
“That makes the rate of success to get a deal done much higher,” Lavon-Krein says. “By the time you get deeper into a deal and have a term sheet out for people to react to and to comment on, you have a pretty good sense of whether you want to do a deal or don’t want to do a deal. And you’ve already engaged with [a law firm] deeply in what the proceeds are going to be used for, what the tax result is, what the options are. You have such a clear picture of what [the transaction] will look like that it’s unlikely for the deal to fall apart.”
– Reporting by Carmela Mendoza, Adam Le, Alex Lynn, Helen de Beer, Madeleine Farman and Katrina Lau.
– This report was updated to correctly show that Kirkland & Ellis advised Coller Capital, not Hunter Point, on their partnership.
– This report was updated to reflect Hunter Point Capital’s latest regulatory filings.