Private equity firms are finding that, rather than doing the deal, they are the deal, as specialist funds and other asset managers see the value in the GP model.
A number of firms who raise capital for the strategy – acquiring stakes in asset managers primarily to access a share of management fees and carry across all the target GP’s vehicles – have enjoyed a strong year of fundraising. Dyal Capital Partners’ fourth fund, for example, had secured $1 billion of commitments as of the end of October and was expected to hold a first close on $2 billion in December.
Deployment has slowed somewhat during 2017 after growth in recent years. There were seven growth or private placement investments into private equity managers from other investment firms or funds as of 20 December, down from 15 in 2016, according to data from S&P Global Market Intelligence.
Goldman Sachs Asset Management is 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. Meanwhile, Hycroft Capital is aiming to raise at least $750 million for its debut fund.
Although the fund of firms model is by no means new. Pennsylvania-based Rosemont Investment Partners was an early adopter of the model, having first raised such a vehicle in 2000.
But as the private equity model has evolved to welcome more long-term funds or permanent capital vehicles, so too have funds of firms. Rosemont, which has so far raised three closed-ended funds targeting minority equity stakes in other investment management businesses, has scrapped the traditional fixed-term fund model, founder Chas Burkhart told PEI in November. It instead plans to launch a $200 million permanent capital vehicle of “unconstrained duration” by the second quarter of 2018.
In July, Blackstone 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. Likewise, Eurazeo, which uses permanent capital, acquired a stake in New York-based Rhône Group in November and is reportedly in discussions with Paris-based Idinvest Partners over a similar investment.
With this flurry of activity late in the year, the trend shows little sign of slowing down in 2018. However, the depth of the exit market remains to be seen, Virginie Bourel, partner and head of strategic advisory at placement agent and advisory firm Triago, tells PEl.
“In some cases, the funds are looking at an IPO for the management company; it could be one by one or a combination of several,” she says. “Even if it’s a minority stake they could share the same view with a partner that has a majority shareholding. We will see that in the next two to three years.”
Some managers of funds of firms have indicated that they plan to hold the stakes for the long term or to sell them on the secondaries market.