What is a GP stakes investment?
GP stakes investments are direct equity investments representing a minority ownership position in a GP’s underlying management company. Typically, the ownership position is passive, non-strategic and non-voting. These investments can be made in alternative fund managers who prefer closed-end or open-end funds.
In recent years, GP stakes deal and fundraising activity has surged—and 2021 appears to be on pace to set records for GP stakes dealmaking. The strategy has become standard practice in the PE industry as more GPs than ever consider selling an equity stake.
Frequently asked questions about GP stakes investingBelow, we’ll answer frequently asked questions about GP stakes investing. Have a question that’s not answered here? Drop it in a comment and we’ll work to include it in future updates.
Do GPs that typically engage in GP stakes investing prefer open-end or closed-end funds?
Currently, the major GP stakes investors tend to invest primarily in GPs that favor closed-end funds, though preferences have changed over time. Initially, a lot of activity involved investments in closed-end funds (specifically hedge funds) that experienced mixed results. Now, firms almost exclusively look for closed-end funds. For instance, since 2016, more than 80 percent of Dyal Capital Partners’ deals have included closed-end GPs, while AIMS hasn’t invested in an open-end GP since 2015.
Open-end funds vs closed-end funds
In the context of GP stakes, open-end funds refer to strategies in which periodic redemptions are possible (namely hedge funds and long-only equity strategies). In contract, closed-end funds refer to investment vehicles that are not subject to investor redemptions such as buyout funds, VC, private credit, etc.
Which types of firms typically receive this form of investing?
Firms receiving GP stakes investments are typically top-performers with a proven track record. For example, the average capital raised for a firm that has received GP stakes investment is $23.4 billion, compared to a non-GP stakes average of $1 billion. This can include managers with varied strategies—from energy and real estate to credit and secondaries. Outside investors also favor firms that show growing assets under management.
Who are some of the major players in GP stakes investing?
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 firm was founded in 1985 and is based out of New York, New York with additional offices in Europe, Middle East, Asia and Australia.
Dyal Capital Partners
Dyal Capital Partners is a PE firm that is dedicated to acquiring minority equity stakes in established alternative asset managers’ companies diversified by investment strategy and geography. The firm was founded in 2010 and operates as a subsidiary of Neuberger Berman Holdings. Tracing its roots back to predecessors founded in the early 1980s, NB Private Equity is recognized as one of the oldest PE investment firms and has managed PE separate accounts and commingled funds for institutions globally. Since its inception, NB Private Equity has been an active PE investor managing investor commitments across primaries, co-investments, private debt, other direct PE strategies and secondaries. Dyal holds GP stakes in more than 40 different investors and merged with Owl Rock Capital through a SPAC mega-deal in 2021.
Goldman Sachs Alternative Investments & Manager Selection Group
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.
Why would a recipient of GP stakes investing be interested in such a deal?
Selling a minority stake can provide liquidity to the recipient management company and allow them to back new business initiatives or otherwise build value. Further, GPs stand to benefit from an LP's operational expertise or specialized knowledge.
Why would an LP be interested in such a deal?
In return for their GP stake investment, LPs receive greater access to the best performing managers as well as a portion of future management fees—not to mention the potential for appreciation in their equity stake.
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), or large LPs such as the Alaska Permanent Fund Corporation.
What are some factors that GP stakes investors consider before making an investment?
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 prospect for future funds.
What are some challenges and concerns regarding 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, potentially 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.
Learn more about GP stakes investingListen to our 30-minute podcast episode
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Read what questions to ask before and during a GP stakes partnership
Download our PitchBook Analyst Note: Choosing your GP Stakes Partner
See why a rise in GP stakes deals doesn't mean a decline in opportunities
Download our PitchBook Analyst Note: GP Stakes Deployment Opportunities