As private equity firms look to expand their grip on alternative assets, 2019 has seen capital flood into GP stakes investing. Dyal's new fund itself has already backed 10 firms, committing around 64% of its capital. And so far this year, total GP stakes fundraising has exceeded $23 billion, open funds included, per PitchBook data. That's more than four times 2016's GP stakes high of $5.3 billion, which was solely represented by Dyal's predecessor.
In GP stakes deals, private equity firms essentially buy passive, minority stakes in other private equity firms. It's a way for firms to raise equity capital without trekking down the arduous IPO route. Stake-selling also presents an alternative to raising more debt, therefore making it a popular option for PE firm founders—who are typically highly levered to the outcomes of their firms—looking to reduce risk.
The investment strategy has proven lucrative.
Dyal's second fund has returned 24.25% net to investors, per New Jersey pension documents. Selection has a hand: GP stakes investors tend to target top-performing managers who pursue new strategies, and who raise significantly larger subsequent funds (a growth measure known as a step-up). The large step-ups and strategy expansion can not only create a cash crunch, forcing managers to seek outside capital, but can also lead to significantly more capital under management. This is key for GP stakes investors because they typically receive a portion of future management fees from all funds.
Three major players currently dominate the space: Dyal, Goldman Sachs and Blackstone. Dyal is king, with about $21.6 billion in aggregate capital commitments. Among its investments are rivals like Vista Equity Partners, Platinum Equity and HIG Capital. Goldman Sachs is active via its Petershill unit, which has backed firms including Harvest Partners. In May, Petershill sought up to $4 billion for a new fund, per Bloomberg. And according to the New York Post, Blackstone is raising a $6 billion GP stakes fund—nearly twice its original target due to outsized demand.
More firms are throwing their hats into the ring. In 2018, 30 private equity firms sold stakes in themselves, per PitchBook data. That's more than double the 13 firms that sold such stakes the year prior. Smaller firms are getting in on the action, too. One example saw London-based Goodhart Partners form Volunteer Park Capital in September 2018 to invest in other middle-market firms.
12/3/19: This article has been updated to correct the spelling of Neuberger Berman.
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Related read: PitchBook's 2Q 2019 Analyst Note: Raising the GP Stakes