GP stakes investing is gaining traction in Europe as a strategy investors can look to for downside protection in times of volatility. However, these GP stakes have a different playbook from their US counterparts.
GP stakes investing is when an asset manager buys a minority equity stake in a PE firm, giving it a cut of the returns. While it is a mature strategy in the US, it is still a nascent asset class in Europe.
Globally, there were 30 deals last year with $3.4 billion transacted in the space. Only six of those were in Europe, with total deal value at $560 million.
The largest deal last year was Petershill Partners’ $450 million acquisition in April of a minority stake in New York-based private credit investment firm Kennedy Lewis Investment Management, valuing the firm at $1.13 billion.
Gilles Dusaintpère, head of GP stake investments at AXA IM Prime, expects GP staking to gain traction in Europe, fueled by market uncertainty.
“Comparing to buyouts, GP stakes is a yielding strategy, so you receive regular distributions—you derisk the investment quite quickly and, along the way, with a stable and robust DPI,” he said.
Dusaintpère added that these investments are relatively shielded from the general market, which LPs like, particularly in the current environment. He is not alone in this view.
Renaud Tourmente, deputy CEO and COO at Armen—a French firm that was among the earliest investors in GP stakes—notes that uncertainty is driving interest in the strategy.
“Geopolitical anxiety in the US is triggering a renewed interest in Europe, which is now viewed as both a value and strategic opportunity,” he said. “Sovereign investment themes are taking shape across defense, energy, infrastructure, food, tech and AI. Capital is flowing into Europe with a clear ambition: to build tomorrow’s European champions through partnerships with tier-one investment firms and GPs.”
The sweet spot
While deals in the US are driven largely by investments in large-cap managers, those investing in European GPs are increasingly focused on the middle market, where a growing number of high-quality, growth-minded firms are emerging as attractive partners.
AXA IM Prime’s GP stakes strategy focuses on middle-market managers, defined as having a fee-paying AUM ranging from €1 billion (around $1.11 billion) to €10 billion.
“Because US GP-stakers are focusing much more on very large managers, it is more a financing type of solution. In Europe, mid-market managers are looking more for strategic partnerships,” said Dusaintpère.
After exploring the firm’s LP base, AXA IM Prime works with it to grow in ways endorsed by its investors, including developing an adjacent strategy, connecting with other LPs and advising the firm on domestic and international expansion.
Tourmente agrees that the middle market is the sweet spot for GP stakes investors in Europe, given the abundant supply of managers of that size and the risk-return profile.
According to Armen data, Europe offers a pool of around 1,000 GPs that each manage between €500 million to €10 billion. Many of these firms are seeking capital to expand, diversify, seed new investments and meet commitments.
And for GP stakes investors, these businesses provide an upside opportunity with downside protection.
“GPs in the mid-market space are SMEs operating in the investment or financial services segment. They have got recurring revenue, good EBITDA margin, predictable cash flows and a very strong downside risk protection if something goes wrong,” said Tourmente.
Another feature unique to Europe is a need for succession planning. Many of the European GPs were founded over 20 years ago, and having an external shareholder can help smooth succession.
“This is a specific catalyst. It is one of many reasons why a firm will execute a GP stakes transaction: It allows you to see and to measure the dynamic of the team,” said Tourmente.
The right partnerships
If GP stakes investing is aiming to drive growth through operational enhancement, then the partnership and alignment of interests are important.
One of the biggest challenges Dusaintpère faces is partnering with the right GP. Around two-thirds of AXA IM Prime’s deal pipeline consists of firms with which it has previously invested.
“The main challenge is selecting the right partners, and it goes both ways: that GPs should do a reverse due diligence on us,” he said. “This is a partnership and not a financial deal. The most important thing is to make sure that we are very clear on what they want to achieve and how we can accelerate their development.”
As with any newly developed asset class, education is another challenge. GP stakes investors often spend a lot of time educating LPs on the specific strategy, explaining their portfolio and the types of deals they seek.
The pace of development can also be unpredictable. While GP stakes in Europe are firming up as an asset class, with law firms, placement agents and investment advisers starting to develop dedicated teams, growth will take time.
Featured image by Say-Cheese/Getty Images
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