Mega-funds are not a new phenomenon, but they are capturing more capital—and managers are achieving mega-fund status more quickly. So far, the mega-fund environment has mostly been controlled by larger household name firms with deep relationships and expertise in a wide range of areas (like Blackstone, Goldman Sachs and KKR), but relatively newer managers are aggressively stepping up fund sizes. In addition to these ambitious step ups, more specialized firms are increasingly emphasizing niche strategies including GP stakes and tech-focused portfolios—providing LPs with differentiated risk/return profiles and growth drivers.
GP stakes fundraising value ($B) including open funds
Mega-funds and GP stakes investing
A recent fascinating evolution in PE involves a swift increase in funds targeting minority stakes in private capital managers. Similar to mega-funds, a handful of mostly large, highly diversified firms are heavily involved in shaping the overall GP stakes space. In fact, the three most prominent firms in GP stakes are raising even larger follow-on funds for purchasing minority, non-voting ownership positions in GPs’ underlying management companies.
According to an analyst note on GP stakes, Blackstone is raising its second GP stakes fund (Strategic Capital Holdings II), which was bumped up to mega-fund status after a warm reception and healthy investor appetite—going from a target size of $3.3 billion to $6.0 billion. Another top player in the mega-fund space, Goldman Sachs is seeking $4.0 billion for its upcoming Petershill fund, via its Alternative Investments and Manager Selection (AIMS) group.
Meanwhile, specialist firm Dyal Capital Partners (the most active GP stakes dealmaker) is expected to close on the largest GP stakes fund ever raised in 2Q 2019. Though the firm had initially targeted $6.0 billion for its fourth GP stakes fund, investor interest further propelled the overall size of the mega-fund to $7.0 billion. Similarly, the firm’s first mega-fund, Dyal Capital Partners III, increased its target size by $2 billion during the marketing period to close at $5.3 billion.
Technology-focused buyouts
Instead of applying a generalist approach, other firms have concentrated on opportunities in the technology sector. Having produced the second-highest returns of any sector between 2009 and 2015, technology is a consistently enticing space for firms that have the appropriate expertise. Further, the capital-light business models many tech companies utilize often result in high rates of recurring revenue and organic growth.
Big names like Silver Lake Management, Thoma Bravo and Vista Equity Partners have all taken note and gone after tech deals with vigor. Silver Lake closed on a $15.0 billion fund in 2017; in January 2019, Thoma Bravo closed on its $12.6 billion fund, and Vista Equity Partners is fundraising for a $16.0 billion vehicle. All three of these tech-focused shops—each of which have raised at least two mega-funds—are making waves with $10 billion+ funds. These GPs are remaining focused while slowly expanding into complementary offerings. In a recent example, Thoma Bravo raised a second fund in its Discover fund family, which targets middle-market deals. Similarly, Vista Equity Partners created its Endeavor fund family, which pursues investments too small for the flagship fund after closing on its first mega-fund.
Though more firms are digging into tech at the moment, GPs will likely continue to find new ways to specialize and innovate to stay competitive and attract LPs, even in the case of mega-funds. Though some LPs will likely continue to look to generic buyout funds, many will no doubt be interested in pursuing opportunities that less traditional funds provide. Notably, these funds present more ways for institutional investors to access private equity and diversify which regions, strategies, companies and vintage years they’re exposed to—addressing a desire for greater PE exposure and increased portfolio diversification.
Want to learn more about mega-funds? Read our analyst note.
