GP stakes investing isn’t a new concept—in fact, the strategy has been around for years. During that time though, the approach and application investors use with regard to GP stakes investing has evolved. This blog post explores what GP stakes investing is, the history of the strategy, and its status at present. We also dive into some relevant questions, reflecting on why an investor might participate in GP stakes investing and how it fits into the current capital market context.
What is a GP stakes investment?
When an asset manager purchases a minority equity stake in a PE firm in exchange for a cut of their returns, they’re participating in GP stakes investing—or buying GP stakes. Typically, the ownership position is non-strategic and non-voting, though it does provide access to the underlying business model and revenue from management fees.
“It’s a niche strategy in an alternative asset world which is already niche. But it’s a strategy that stretches back decades and has provided investors with consistent returns by investing in a PE firm rather than taking over a business,” said former PitchBook financial writer Adam Lewis.
What is an equity stake?
An equity stake is the percentage of ownership or shares that an investor holds in a company. A minority stake investor typically owns 10-30%—but up to 50%—of a company’s shares. A majority stake investor owns 50% or more of a company’s shares, and therefore has more power and influence, via voting rights and other benefits, over key decisions being made within the company.
What’s the relationship like between a GP and the PE firm they’re investing in?
The relationship between a GP staking firm and the GP they invest in can be akin to that of a typical GP and its portfolio company. As one GP stakes fund manager put it, “We are just a PE firm investing in and lending support to companies. The companies in which we invest just so happen to be alternative asset managers.” In both instances, the company being invested in likely expects to learn from their investor team and to expand their network through the relationship.
However, in some instances, a portfolio company—an organization that has given up more of their ownership and control in exchange for capital—may expect a more hands-on approach from their GP. Since GP stakes investing involves minority equity stakes, the firm being invested in retains more ownership and control, and they may not need or expect the same level of support from their GP team.
Who invests in GP stakes?
A GP stakes investor is any entity that chooses to pursue a minority ownership stake in a PE firm. Today, GP stakes investors are typically PE firms who use capital from their GP stakes funds—provided by their LPs—to secure minority investments. LPs have access to the benefits and returns generated by the PE firm’s ownership, which is part of the LP’s overall investment portfolio.
In the past, when GP stakes funds were less common, LPs could directly invest in a PE firm form minority stakes—making them a GP stakes investor. They could do the same today, but we don’t see it as much.
So, the term GP stakes investor applies to whichever entity is actually doing the investment/deal.
How do you invest in GP stakes?
In private investing, GPs—the managing partners of PE or VC funds—typically raise capital via limited partners to form funds. GPs then use those funds to invest in private businesses of all kinds in exchange for shares, or units of ownership.
Similarly, in GP stakes investing, a GP uses LP-raised capital to buy stakes—an intentional slice of ownership, usually expressed as a percentage—in a specific type of private business: another general partner, typically a private equity firm.
What is the history of GP stakes investing?
Though GP stakes investing has been around for some time, the environment as we know it today was heavily influenced by a few handfuls of key events in more recent history. From LPs and large asset managers making direct deals based on long-term relationships to an explosion in new firms specifically built around GP stakes investing, the strategy has undergone significant shifts.
Key eras and critical inflection points in the strategy’s more recent development are outlined below.
GP stakes in the early 2000s (2001-2007)
During this stretch of years, a number of large LPs around the globe began buying passive minority stakes in leading PE firms. For example, GIC, a sovereign wealth fund, and CalPERS, a public pension fund, made GP stakes investments into PE firms like Apax Partners, CBC Group, and Silverlake. For LPs, being able to build a close relationship with a small number of leading GPs was a draw. Meanwhile, for GPs, the relationship was viewed as a good long-term strategic investing move.
2001
CalPERS acquires a minority stake in the Carlyle Group for $175M2004
Affiliated Managers Group (AMG) makes its first minority investment, buying a stake in AQR Capital Management2007
Apollo receives outside investment from both CalPERS and Abu Dhabi Investment Authority
GP stakes in the mid-2000s (2007-2015)
During the mid-2000s, diversified asset management companies with deep relationships worked to solidify their approach to GP stakes investing. Many built specialized teams and raised their inaugural GP stakes funds during this time. However, as the prominence of co-investing and competition for capital increased, LPs started running into the thorny issue of whether or not they could fire a PE firm that they’d made a GP stakes investment in. Also, other LP investors—potential co-investors—started asking whether they were going to see the best co-investments from a given GP if that GP was partially owned by a peer.
From 2007-2014, prominent PE firms went public, from Blackstone in 2007 to Ares in 2014. Those decisions weren’t without their own challenges tough, as the public markets didn’t know how to properly value their complex, illiquid businesses. Additionally, the scrutinous regulatory environment—reporting, compliance, and overall cost—left some PE firms asking whether going public was worth it at all.
2007
Goldman Sachs’ AIMS Group raises $1B for its inaugural GP stakes vehicle, the Petershill I fund2007
Blackstone goes public2010
KKR goes public2011
Dyal Capital Partners, now Blue Owl after merging with Owl Rock, is formed from Neuberger Berman, raising $1.3B for their debut fund2011
Apollo goes public2012
The Carlyle Group goes public2013
Blackstone launches its initial Strategic Capital Holdings fund, which raises $3.5B2014
Ares goes public2014
Dyal Capital Partners II closes at $1.8B
GP stakes in the modern era (2016-present)
More recently, GP stakes firms continued to raise capital—and in 2016, a significant milestone was reached with GS AIMS’ Petershill I fund sold its remaining holdings directly to publicly-traded AMG. This was proof of concept for an exit, showing the strategy could deliver liquidity. With renewed optimism, Goldman Sachs and Dyal Capital began to invest more heavily in this area—raising multiple new funds. Meanwhile, a number of new players were encouraged to join in.
Fast forward to Q4 2021, when fundraising surged and more than $20 billion in capital was raised across GP stakes funds. The strategy became more standard practice in the PE industry, as more LPs dipped their toe into these kinds of allocations and GPs reconsidered selling equity stakes vs. going public.
2016
GS AIMS’ Petershill II closes at $1.5B2016
GS AIMS’ Petershill fund strikes a deal to sell its remaining holdings to AMG for $800M2016
Dyal Capital Partners III fund closes at $5.3B2017
Aberdeen Asset Management forms Bonaccord Capital Partners to pursue a GP stakes strategy with an initial $1 billion2018
GS AIMS closes Petershill Private Equity fund at $2.5B2018
Meteor5 Capital Advisers forms, targeting emerging and future leaders with a $125 million Meteor5 Capital Fund I2021
$20B is raised across GP stakes funds in Q12024
As of Q2 2024, deals targeting GPs are on track to set an annual record—89 deals have been announced or completed through July, an 84% increase YoY
What is the prevalence of GP stakes investing today?
The world’s largest asset managers spent less money on GP stakes in 2023 than they had in a decade, but they’re ready to deploy capital in 2024, according to PitchBook News. Bogged down by market volatility in 2023, GP stakes buyers and sellers retreated from the market. After an uptick in Q4 2023, it looked like managers were gearing up to deploy capital from their GP stakes funds.
What are the market drivers of GP stake investing?
There are a variety of market factors and firm-specific considerations driving GP stakes, all of which are subject to change over time. Though the topic is nuanced, some of the major GP stakes market drivers at present include:
- Higher yields: A primary drivers of GP stakes investing, returns can reach anywhere from 7% to 10% and grow to the mid-teens in mature portfolios. Over a decade, a PE fund can swell by more than 3x its original size, increasing firm multiples and providing substantial returns.
- Fund structure: The GP stakes fund structure encompasses a 10+ year life cycle, allowing LPs to avoid reallocation to new funds in order to maintain target distribution, too.
- Downside protection: The GP’s annual management fee offers significant downside protection, while carried interest has the potential to ensure upside growth dependent on fund performance. For example, if a firm sells its stake and does not raise another fund, the stake investment will still recover 70% to 90% of its original cost.
What are some challenges and concerns associated with GP stakes investing?
A consistent complaint from publicly-traded PE firms is that traditional equity investors don’t know how to properly value their business, leading to persistent undervaluation.
From the investor side, there is some concern that the manager receiving a GP stakes investment may change their strategy in a way that maximizes income for the management company at the expense of underlying investments.
Additionally, the highly specialized nature of this strategy could mean that there’s only enough room for a handful of deep-pocketed managers.
GP stakes FAQ: LPs, asset managers, and their GPs
What are the benefits of a GP stakes investment for a limited partner?
In return for their GP stakes investment, LPs get access to the best-performing managers and stand to forge close relationships with a core group of quality firms, potential co-investment and warehouse opportunities, the ability to seed new strategy launches, and possibly receive allocations to otherwise oversubscribed funds.
The GP/LP structure is predicated on aligned interest. An LP might be a passive minority owner without a seat in the boardroom, but they are entitled to the pro-rata portion of all capital leaving the GP firm. For example, if the LP is a 15% owner, when a dollar leaves the GP firm, .85 goes to whatever founder or owner group is being invested in and .15 goes to you, the passive minority. There’s aligned interest there.
“The minority investor can feel comfortable putting their head on the pillow at night knowing that the long-term interest of the GP is aligned. You can feel good knowing you don’t have control, but that you’re attached at the hip with some of the brightest dealmakers and business-builders in the world,” Michael Rees, co-president at Blue Owl and former founder of Dyal Capital Partners, said during a GP stakes-focused webinar hosted by PitchBook.
What kinds of LPs are typically involved in GP stakes investing?
Most LPs that commit to GP stake funds are well-established PE investors that have been allocating capital to alternative assets for decades. This includes dedicated funds raised by groups like Dyal Capital Partners and Goldman Sachs’ AIMS group, but also includes publicly-traded conglomerates like Affiliated Managers Group (AMG) and large LPs such as the sovereign wealth fund Alaska Permanent Fund Corporation.
Who are some of the key GPs in GP stakes investing?
Blackstone
The Blackstone Group is a multinational PE firm that specializes in leveraged buyouts (including both public-to-private acquisitions and add-on transactions), restructurings, and private placement funding. The firm serves a variety of industries including energy, insurance, financial, and technology. The Blackstone Group was founded in 1985 and is based out of New York, with additional offices in Europe, Middle East, Asia, and Australia.
Blue Owl Capital (formerly Dyal Capital Partners)
Blue Owl is a leading asset manager that invests across three multi-strategy platforms—credit, GP stakes strategic capital, and real estate. The firm is also a Registered Investment Adviser (RIA). Founded in 2011 as Dyal Capital Partners, the New York-based firm merged with Owl Rock Capital through a SPAC mega-deal in 2021. As of September 2024, Blue Owl has $192 billion AUM and more than $32B in dry powder.
Goldman Sachs Alternative Investments & Manager Selection Group (AIMS)
Goldman Sachs Alternative Investments & Manager Selection Group is an investor in private equity funds. The firm offers fund-of-funds, co-invests in direct investments, and provides liquidity and portfolio management solutions to existing PE investors via the secondary market. The firm’s comprehensive global PE program seeks to construct a diversified PE portfolio and considers each potential investment’s strategy, geographic focus, competitive advantages and return profiles, including how a particular opportunity may affect the portfolio’s volatility and risk.
Wafra
Founded in 1985, Wafra is a private equity firm based in New York City. The firm invests across a number of asset classes including strategic partnerships, real assets, and real estate. Over the past 12 months, Wafra has made GP stakes investments in Oak Hill Capital, MML Capital Partners, and Greenbelt Capital Management.
What key factors do GP stakes investors consider before investing?
Before making an investment, GP stakes investors will examine a firm’s business from every angle. This includes analyzing everything from LP-GP relationships and alignment of incentives, to understanding the nuances of how the GP management company generates revenue. Other important factors include the sustainability of the management company’s long-term revenue streams and its prospects for future funds.
Where do GP stakes exist within a private equity portfolio?
Although strategies vary, GP stakes investments are often placed in a growth equity portfolio, designed to deliver large and mid-cap growth stocks returns at a lower cost for LPs. Firms focused on equity growth invest in late-stage, high-performing companies to maintain their development.
GP stakes FAQ: The GPs being invested in
What are the benefits of a GP stakes investment for the GP selling a stake?
In the shorter-term, selling a minority stake can provide GPs with access to much-needed liquidity and provide a pathway for them to back new business initiatives. GPs stand to benefit from a limited partner’s operational expertise and/or specialized knowledge, too.
Over the longer-term, GPs may assume that a close relationship with their LP partner(s) will benefit their strategic investing profile. As part owner of the GP’s firm, it stands to reason that the LP would continue to invest in the GP’s future funds.
More direct benefits might include easier access to other entities within their expanded network or potential for access to certain shared resources.
What questions should a GP ask themselves before they sell a stake in their own firm?
GPs need to ask themselves some basic questions and seek expert advice, likely from a banker that has run these processes before, and an attorney well-versed in these types of deals. Questions to ask before and during the process include:
- Am I large enough to sell a stake in my firm?
- Do I have a succession plan in place?
- How will my LPs react?
- Why do I want to sell a stake in my business?
- What is the buyer’s expertise?
- Is the equity I’m selling primary, secondary, or a mix of both?
- Do I or the next generation plan on buying this stake back?
For a full list of questions, including initial, strategic vs. financial, price and structure, and more, download our Analyst Note: Choosing Your GP Stakes Partner.
More on GP stakes from PitchBook News
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