This article is based on a prediction from our 2019 Private Equity Outlook.
Prediction
GP stakes will experience ongoing innovation
Rationale
Early adopters of the GP stakes strategy have been successful in expanding their investing into more niche areas of alternatives, including transactions in 2018 targeting VC and real estate firms. In 2019, we expect to see further innovation in dealmaking, with GP stakes funds continuing to develop new ways to tap into smaller targets and promising emergent managers. We also anticipate concerted efforts to realize investments and predict a major liquidity event—likely an IPO—of a portfolio of GP stakes as pioneering investors seek out viable liquidity options for early LPs.
Caveat
Several firms have tried and failed to launch GP stakes teams and funds, including AlpInvest (a Carlyle Group company). The highly specialized nature of the strategy could mean there’s only enough room for a handful of deep-pocketed managers. If this is the case, it would almost certainly curtail innovation.
Background
As alternative investment strategies have proliferated, one of the most intriguing innovations has been GP stakes—which involves investing in an alternative asset manager’s underlying management company, as opposed to committing capital to their fund(s). The forbearers of this strategy have now raised several multi-billion-dollar funds and have focused their attention on large, established targets. Activity in recent years has accelerated at a fever pitch, with 2018 setting an all-time high for GP stakes deals by a wide margin. October alone saw seven transactions— more than the annual total for each year prior to 2013.
See our timeline highlighting recent critical moments in GP stakes investing.
Case study
Newly formed Meteor5 Capital brings a novel approach with a focus on first-time managers. Instead of establishing a stake in the entire GP, Meteor5 only takes a stake in the manager’s first two to three funds.
Conclusion
Despite being a relatively new strategy, GP stakes investing has already experienced numerous shifts—and we expect that to continue. Often seen as an alternative to a public listing, the strategy can provide liquidity to founders, expand a firm’s investor base and help facilitate succession planning. This becomes increasingly important as the average age of founders and partners of GPs increases and their need for liquidity becomes greater.
Still, some groups (like Dyal) are considering alternative ways to combine GP stakes deals and an IPO, such as through a holding company where a portfolio of minority GP stakes are designated as initial assets. The inevitable need for liquidity and competitive nature of these deals will encourage firms to innovate in this space and continue to search for new ways to optimize.
Get more insight into 2019’s major PE trends with our 2019 PE Outlook report.
