Asset managers that purchase interests in other managers — deals commonly known as GP stakes — have risen in number and size over the years, but limited partners haven’t always viewed such transactions positively. New data may be able to dispel some “outdated” ideas about what happens when general partners sell stakes in their firms.
According to a PitchBook analyst note published Tuesday, LPs invested in the funds of a GP that is selling a minority stake “often have a neutral to negative view of the deal.” The aversion from LPs comes from a belief that the manager is “cashing out and/or will pursue asset gathering over returns going forward” and “presumes the GPs that sell minority stakes were not already economically incentivized to boost long-term value,” the report said.
But, according to PitchBook senior analyst Wylie Fernyhough, this assumption is not supported by the data. As he and his colleagues concluded in the report, “the notion that managers would be incentivized to do anything that may jeopardize the long-term value of the GP before or after selling a stake is unfounded.”
Speaking to Institutional Investor, Fernyhough added that “there’s just a level of nuance that maybe isn’t understood or appreciated by LPs more broadly with these deals.”
Selling a Stake Doesn’t Impact Performance
After GP stakes deals, the PitchBook researchers found that the numbers of top-quartile funds in real estate, debt, and buyouts experienced a slight, but largely insignificant, reduction in internal rates of return, or IRR, post-GP stakes deal. The proportion of funds in the top two quartiles also remained similar pre- and post-GP stakes deals. For instance, firms that sold a stake between 2011 and 2021 reported having 71 percent of their buyout funds in the top two quartiles. This figure dropped to 67 percent post-GP stake sale.
“We really found that performance more or less stays the same pre-stake and post-stake deal, which is effectively to say, managers that outperform beforehand will tend to outperform after,” said Fernyhough.
In order to track growth in assets under management, PitchBook also looked at step-ups in fund sizes and the number of strategies that firms offered. In terms of step-ups, researchers found that GPs act more “conservatively” after selling a stake, rather than aggressively sizing up their next funds.
“That very much dispels the notion that [managers] just focus on asset gathering or growing at all costs after selling a GP stake,” Fernyhough said.
The number of strategies did increases for firms that had sold GP stakes, according to the report. But, the PitchBook researchers noted, this finding shouldn’t be surprising as GP stake transactions are largely intended to provide capital for business expansions, such as launching new strategies and hiring more staff.
With Larger Allocators Comes Greater Focus on Growth
PitchBook’s analysis comes as firms like Blackstone Strategic Capital Partners, Dyal Capital Partners, and Goldman Sachs’ Petershill unit increasingly buy up 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 precisely right,” Ward told II. “But the questions in the beginning are, in my mind, outdated.”
Ward worked Lehman Brothers in 2008 before joining Neuberger Berman. In 2010, he co-founded Dyal, which now has around $25 billion in AUM in GP stake funds, Ward said. From Ward’s perspective, GP stake deals have become a widely accepted part of the private equity “lifecycle.” Still, he noted that some investors may harbor the aforementioned negative ideas about managers in the GP stakes game.
“A small subset of the old-school alternatives investors —endowments and foundations, family offices —still take the old view that ‘I want to invest with small, monoline, niche-y managers who own 100 percent of their firm.’ We frankly do not hear this view much anymore,” Ward said. “They used to be the most important investor in every room they went into, but they’ve been overshadowed now as much larger allocators, including public pension plans and sovereign wealth funds, have increased their investments in private markets. Many investors view the sale of a minority stake as a natural part of a business’s evolution and want their GPs to grow in order to do more and be true strategic partners.”
As for the future of GP stakes, Ward said he believes the space is becoming more diversified and capital from selling minority stakes will continue to be needed as private markets continue to grow.