The New Frontier: How GP Stakes are Shaping Private Equity Markets
General Partner (GP) stakes are redefining the private equity landscape. This investment strategy involves acquiring minority stakes in private equity firms and offers substantial growth capital, operational support, and strategic alignment. This blog explores the integration of GP stakes with secondary markets, strategies for breaking into GP stakes, the expanding addressable market, and the intersection with impact investing.
The Integration of GP Stakes and Secondaries
Recent trends show a convergence between GP stakes and secondary markets, driven by their inherent synergies. Blackstone's integration of its GP stakes unit into its $69 billion secondaries division, Blackstone Strategic Partners, exemplifies this trend. By leveraging its extensive network and due diligence processes, Blackstone can more effectively source and execute transactions.
Other firms are following suit. Blue Owl Capital launched a secondaries business, and Apogem Capital raised $1.1 billion for a GP stakes joint venture. This convergence aims to solve liquidity constraints and provide growth capital, underscoring the strategic importance of GP stakes in enhancing the value proposition of secondary investments.
Breaking into GP Stakes
Managers looking to launch a GP stakes strategy should target underserved segments or regions. Armen, a Europe-focused GP stakes manager founded by former Ardian and Capza executives, focuses on mid-cap GPs and has raised €150 million towards a €400 million target. Similarly, Hunter Point Capital secured $3.3 billion for its debut fund, targeting mid-market GPs in the US.
Successful managers often have extensive experience in private equity, which provides a deep understanding of GPs' challenges. This background allows them to offer valuable support beyond financial investment, such as fundraising assistance and strategic development.
The Appeal to Private Wealth
Due to their defensive business model and stable cash flow, GP stakes increasingly attract family offices and ultra-high-net-worth individuals (UHNWIs). These investors value the long-term nature of GP stakes investments and the potential for significant capital gains. Armen's success in raising €150 million from private wealth investors exemplifies this trend.
Michele Lee from Capstone Partners notes that private wealth investors are often more receptive to the perpetual nature of GP stakes investments than institutional investors. The potential for long-term income generation and participation in the growth of successful private equity managers drives this interest.
The Expanding Addressable Market
The GP stakes universe is a lot bigger than some people might expect. Wafra, one of the leading GP stakes investors, shared data indicating that there are more than 2,500 targets in the market. Investcorp, a mid-sized GP stakes investor, estimates that there are about 740 private market mid-sized GPs in North America and Western Europe that have not sold a stake. Furthermore, about 15% of managers in the credit space have sold a stake, the highest percentage across all asset classes. This is followed by buyouts and growth (11%), real estate (9%), infrastructure (7%), secondaries (4%), and venture capital (1%).
Data from Wafra shows that family offices and UHNWIs are increasingly interested in backing quality fund managers. Armen's successful fundraising from family offices demonstrates the growing private wealth appetite for GP stakes. The defensive nature of GP stakes strategies, where revenue is generated from management fees rather than product sales, attracts private wealth investors looking for stable investments. Michael Larsen from Cambridge Associates highlights that large family offices may devote substantial portions of their illiquidity to acquiring stakes, viewing it as a long-term relationship akin to transitioning from renting to owning.
The Intersection with Impact Investing
GP stakes also make significant inroads into impact investing, addressing global challenges such as climate solutions and inclusive capitalism. Capricorn Investment Group leverages GP stakes to support the growth of impact-aligned capital markets strategies. Capricorn's Sustainable Investors Fund I focuses on climate solutions and has deployed capital across various asset management firms.
William Orum from Capricorn underscores the significant leverage GP stakes can provide in impact investing. Subsequent capital raises and deployments can potentially amplify the impact multiple times. This approach aligns with broader trends toward sustainable and responsible investing.
Carving Out a Niche
New GP stakes managers can carve out a niche by targeting underserved segments or regions. Armen targets mid-cap GPs in Europe, while Hunter Point Capital focuses on the US mid-market. This strategy helps avoid direct competition with established players and creates opportunities in niche markets.
Successful GP stakes managers often have extensive private equity experience, providing a deep understanding of GP challenges. This experience allows them to offer valuable support beyond financial investment, such as fundraising assistance and strategic development.
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Luring LPs
The increasing number of funds dedicated to GP stakes raises competition for securing LP commitments. Investors may select a GP stakes manager based on how well the strategy fits into their investment portfolio. Large pension firms like CalPERS or CalSTRS might prefer larger US GP stakes firms with evergreen vehicles for their yield potential. At the same time, family offices might favor closed-end funds delivering significant capital gains at exit.
Addressing Conflicts of Interest
Integrating GP stakes with secondary strategies raises potential conflicts of interest. For example, Blackstone maintains a strict separation between its GP stakes unit and the broader organization to prevent information leakage, ensuring that confidential GP data is not misused.
Despite these concerns, the primary attraction for GPs remains the capital provided by GP stakes investors. A lawyer specializing in GP stake transactions notes that the operational expertise offered by GP stakes funds is secondary to the financial support they provide.
GP Stakes Firms Slowly Warm to Asia-Pacific
Although GP stakes transactions have been limited in the Asia-Pacific region, a growing number of firms are setting up operations there. The relatively untapped Asia-Pacific market is becoming increasingly attractive as transactions become more common in the US and Europe.
Hunter Point Capital, a New York-based manager, registered a Hong Kong office in June, initially led by Rex Chung, a former executive. Similarly, Bonaccord Capital Partners expanded to the region, tapping Chris Lerner in Singapore to help portfolio GPs expand their LP base and source potential sponsor targets.
Historically, Asia has been a venture and growth market, presenting challenges in predictability and volatility. However, growth equity continues to dominate Asia-Pacific dealmaking, representing at least 50% of regional deal value since 2018, according to Bain & Co.
The control opportunity in Asia is beginning to open up. While most early players started in the 2010s, the market's maturation is creating more viable targets for GP stakes. Pacific Current Group, an early mover in the region, has been active for over a decade, with a portfolio that includes Sydney-based Roc Partners.
High-profile transactions like Blue Owl's Dyal Capital Partners' acquisition of a minority stake in MBK Partners show the region's potential. Despite geopolitical tensions and regulatory uncertainties, firms like Blue Owl expect to complete more deals in Asia, recognizing its growing opportunities.
Conclusion
Integrating GP stakes with secondary strategies, the expanding addressable market, and the intersection with impact investing are reshaping the private equity landscape. As more firms explore these strategies, the market for GP stakes is set to expand, driven by the demand for innovative investment solutions and the appeal of stable, long-term returns.
Overall, GP stakes are not just a trend but a transformative force in private equity. They offer a unique blend of growth capital, operational support, and strategic alignment, making them an essential tool for modern private equity firms. As the market continues to evolve, GP stakes will play an increasingly central role in shaping the future of private equity investments.
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Director & Head of Origination at Finex Hong Kong Limited
4moThis trend will likely only get bigger