What about GP stakes in the current market ?

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What about GP stakes in the current market ?

Buyout bosses are looking to sell an increasingly valuable asset: themselves.

Bankers, investors and placement agents say that in recent months more private equity houses have approached them about doing deals in the so-called GP stakes market, where managers can sell off chunks of their own business.

Stake sales were once a common tool for founding partners to cash out of their firm. Now, general partners are quietly weighing them up for a very different reason: to grow even bigger.

With buyout shops raising new multi-billion dollar funds, pursuing global expansion plans and launching a swathe of new products, the GP stakes market is providing more PE firms with fresh capital to fuel their growth engines.

And just as private equity houses are taking a more active interest in selling stakes, so too are investors taking a more active interest in buying them, as they look to generate revenue from the management fee income as well as a portion of the carried interest income and additional balance sheet income.

Goldman Sachs’ Petershill Partners, one of the most prominent players in the market, raised £1.2bn when it listed an investment vehicle on the London Stock Exchange last September.

In November Blackstone closed its second GP stakes fund at $5.6bn and one month later Petershill raised $5bn for its fourth stakes fund.

Closing big funds
One GP stakes banker says: “Deal activity is very healthy. All of the GP stakes providers have recently raised new funds or are closing big new funds. Based on the success of the deals they did between 2015-2021, and how well the portfolios have held up during Covid, it has made their LPs a lot of money”.

The banker, who wished to remain anonymous, adds: “There are scores of firms in the mid-market that are now looking at it after seeing lots of other folks who’ve done it be successful”.

A Pitchbook report from last summer noted that the mid-market appears to be especially appealing for capital deployment: “Of all the segments as we define them, this space has the best combination of market size and ability to deploy capital, with approximately $400bn in firm enterprise value.”

Ali Raissi, global co-head of the Petershill group within Goldman Sachs, tells Private Equity News that the market is developing: private equity firms are no longer motivated purely by the cash that these deals bring in but by the new partnerships that they create.

“It’s not just about the capital anymore,” he says. “Capital is generally available. You can get capital from LPs and from other sources, but for the best firms, they’re also looking for what they get in addition to that.”

He explains: “We’ve put together a GP services team that focuses on delivering post-partnership services – that ranges from helping partner firms think about new product development to building out new offices to capital raising.”

Raissi adds that while the US was the first core market for GP stakes, new deals are springing up across both Europe and Asia.

Despite global activity hotting up, there have been questions over the supply of future deals. Many of the largest household PE names have already sold a stake. Others such as TA Associates and Bain Capital have publicly stated their intention not to do so due to their partnership models.

However, the playing field is potentially huge: last summer Pitchbook estimated that the total enterprise value of the firms it tracks to be more than $800bn. “Assuming a select per cent in each size bucket sells a 20% stake, that would still be a massive $100bn+ opportunity set,” the data company said.

Just as the secondaries market provides LPs with liquidity when they sell positions in private equity funds, so too can the GP stake sales market provide PE managers with much-needed capital, especially now that the fundraising frenzy is in full swing.

Fundraising traffic jam
“Private equity firms are experiencing a traffic jam in the fundraising market…Some of these firms are realising that future fundraises would be more successful and less time consuming if they had a GP stake partner who could help with fundraising,” says Joseph Lombardo, head of private equity GP advisory at investment bank Houlihan Lokey.

Lombardo adds that often GP stake sale proceeds are reinvested into the firm’s funds to increase the firm’s GP commitment: “Partners of private equity firms have come to realise that a large GP commitment to a fund can materially increase the size of that fund’s first close. These large first close GP commitments accelerate fundraises while demonstrating to LPs that the firm’s partners believe in the firm’s strategy and the current market opportunity.”

William Barrett, co-founder of fundraising advisory firm Reach Capital, says stake sales are now routinely part of his fundraising conversations with GPs.

“When we’ve been having general fundraising discussions with GPs, at some point the subject of how GPs are structured or whether they need to get someone in comes up.”

He adds: “The main motivation for most GPs that we see considering this is that it stabilises the fundraising and makes sure there are no surprises.”

Selling a stake can open up a new network of LPs on the fundraising trail, according to Pitchbook’s private equity analyst Wylie Fernyhough. He says: “Let’s say you’re a mid-market buyout firm based in the US, and most of your capital is raised from US-based pensions.

"Investcorp is based out of Bahrain, so they have deep connections in the Middle East, whether it’s with sovereign wealth funds or family offices, so theoretically it might open up your pocketbooks to something entirely new.”

Nervous no more
The nervousness that private equity bosses might once have had about letting a third party into the businesses no longer seems to be an issue, Fernyhough adds, “because so many firms have done it and have spoken positively about it publicly and privately”.

Jonathan Harvey, who works in Investec’s fund solutions team, is also seeing more stake-sale interest in Europe as a result of PE firms looking to follow in the footsteps of Bridgepoint by going public.

Harvey says that GPs looking to do an IPO might turn to stake sales to partner up with an experienced investor so that they can better diversify their asset base into alternative markets such as real estate and credit.

“Taking money into a GP or having someone invest in it allows you to divest by strategy, which makes you much more appealing to the public markets,” he says.

https://www.penews.com/articles/for-sale-gps-eye-stake-sell-offs-in-race-for-growth-20220411