Worried that your GP is selling a stake? Here’s why you shouldn’t be.


Asset managers who buy stakes in other managers – transactions commonly referred to as GP stakes – have grown in number and size over the years, but limited partners have not always viewed these transactions positively. New data may be able to dispel some “stale” ideas about what happens when general partners sell stakes in their businesses.

According to a PitchBook analyst note published Tuesday, LPs invested in funds from a GP that sells a minority stake “often have a neutral to negative view of the transaction.” The aversion to LPs stems from the belief that the manager “cash in and / or will continue to collect assets on future returns” and “assumes that GPs who sell minority stakes were not already economically incentivized to increase equity. long-term value, ”the report said.

But, according to PitchBook senior analyst Wylie Fernyhough, that hypothesis is not supported by the data. As he and his colleagues concluded in the report, “the idea that managers would be pressured to do anything that could compromise the long-term value of the GP before or after the sale of a stake is unfounded.”

Talk to Institutional investor, Fernyhough added that “there is just one level of nuance that perhaps is not understood or appreciated by LPs more broadly with these chords.”

Selling a stake does not affect performance

After the GP equity transactions, PitchBook researchers found that the number of top quartile funds in real estate, debt and buyouts experienced a small, but largely insignificant, reduction in internal rates of return, or TRI, after the GP shareholdings transaction. The proportion of funds in the first two quartiles also remained similar before and after equity investment transactions. For example, companies that sold a stake between 2011 and 2021 reported having 71% of their buyout funds in the top two quartiles. This figure fell to 67% after the sale of the stake in the GP.

“We have really found that the performance stays more or less the same before and after the equity investment, which is to say that managers who outperform before will tend to outperform after,” said Fernyhough.

In order to track the growth in assets under management, PitchBook also looked at increases in fund size and the number of strategies offered by companies. In terms of progression, the researchers found that GPs act more “conservatively” after selling a stake, rather than aggressively evaluating their next funds.

“This dispels much the idea that [managers] just focus on collecting assets or growing at all costs after selling a GP stake, ”Fernyhough said.

The number of strategies increased for companies that had sold GP stakes, according to the report. But, the PitchBook researchers noted, this finding should come as no surprise, as GP’s equity deals are largely geared towards providing capital for business expansion, such as launching new strategies and investing. hiring of additional staff.

With larger beneficiaries, the focus is on growth

PitchBook’s analysis comes as companies like Blackstone Strategic Capital Partners, Dyal Capital Partners and the Petershill unit of Goldman Sachs are increasingly buying stakes in private equity managers.

Sean Ward, senior managing director of Dyal – now called Blue Owl Capital after a controversial merger with Owl Rock – said he was “a little surprised” when he saw the PitchBook report. “I think the conclusions are absolutely correct,” said Ward II. “But the questions at the beginning are, in my mind, outdated.”

Ward started in the GP holdings business in 2008 at Lehman Brothers. In 2010, he co-founded Dyal, which now has around $ 25 billion in assets under management in GP’s equity funds, Ward said. From Ward’s perspective, GP equity transactions have become a widely accepted part of the private equity “life cycle”. Still, he noted that “old-fashioned alternative investors” – such as endowments, foundations, and family offices – can harbor the aforementioned negative ideas about managers in the GP stakes game.

“A lot of them still have the old idea of ​​’I want to invest with small, nimble managers who own 100 percent of their business,’” Ward said. “But they’re not that important on a relative basis anymore. Previously, they were the biggest investor in any room they were in, but have now been eclipsed as much larger allocators, including public pensions and sovereign wealth funds, have increased their investments in private markets. Many investors see the sale of a minority stake as a natural part of the evolution of a business and want their GPs to grow in order to do more and be true strategic partners.

As for the future of GP holdings, Ward said he believes the space is diversifying and capital from the sale of minority holdings will continue to be needed as private markets continue to grow.

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