In the dynamic landscape of private equity, General Partner (GP) stakes investments have emerged as a strategic avenue with significant potential. These investments involve acquiring minority shares in other GPs, providing indirect exposure to fund returns and balance sheets. While 2023 witnessed a momentary slowdown in GP stakes, the strategic value and long-term prospects of this investment strategy remain robust.
According to data from PitchBook’s Q3 2023 US Public PE and GP Deal Roundup Report, deal activity involving GPs as targets experienced a decline in the first 10 months of the year. Deal count was down by 8.3%, and deal value dropped by 25.3% compared to the previous year. However, the slowdown appears to be temporary, as Q4 saw an uptick in GP stakes deal volume. This resurgence bodes well for the market’s growth prospects in 2024.
For General Partners, selling a minority interest in their business through GP stakes investments is more than a financial transaction. It serves as a strategic move to infuse capital that can be pivotal for fundraising and dealmaking. In a market where fundraising dynamics are evolving, a well-timed GP stakes deal can provide the necessary resources for expansion and strategic initiatives.
Goldman Sachs 2023 family office investment insight study explained family offices anticipate allocating a larger portion of their resources to alternatives throughout the upcoming year. Asia accounted for almost 22% of the respondents in that study. The study reveals that globally, private equity, private real estate and infrastructure, hedge funds, and private credit were allocated at an above-average rate of 44%.
The concept of purchasing ownership and non-ownership stakes in asset and wealth managers traces back to the early 2000s. Over the years, the market for GP stakes investments has expanded, driven by rampant consolidation in asset management and continued fundraising challenges. Prominent firms like Blackstone and Blue Owl have developed dedicated programs to invest in their peers, emphasizing the strategic importance of such investments.
Industry experts express optimism about the market’s growth in 2024. GP stakes, involving the sale of a minority interest in a business, can provide a capital infusion for fundraising and dealmaking. While traditional GP stake deals will continue, there is an evolution in deal structures, with GPs exploring alternative methods for liquidity without giving up permanent equity ownership. Despite challenges, the industry anticipates a resurgence of GP stake deals in the next year or two, driven by a loaded pipeline and increasing interest from both sellers and buyers.
As private investors consider GP stakes investing in 2024, several key concerns should be taken into account to make informed and strategic decisions.
Market Conditions
Keep a close eye on the overall market conditions. Economic uncertainties, geopolitical events, and global financial trends can impact the success of GP stakes investments. Assess the stability and resilience of the market to make informed investment decisions.
Due Diligence Challenges
Conducting comprehensive due diligence on General Partners remains a challenge. Obtaining transparent and detailed information about the GP’s performance, investment strategy, and risk management practices is crucial. Investors should be concerned about the availability and accuracy of the information they can access.
Competition and Valuations
Given the growing popularity of GP stakes, increased competition can impact the availability of attractive opportunities. Investors should be concerned about the potential for higher valuations, which may affect the overall returns on investments. Assess the competitive landscape and its implications for deal sourcing and pricing.
Exit Strategy Challenges
GP stakes investments are typically long-term commitments, and exit opportunities may be limited. Investors should be concerned about the lack of liquidity and plan for potential challenges in exiting their investments. Understand the exit strategies available and the implications for portfolio management.
Diversification and Expansion Strategies
Evaluate your overall investment portfolio and consider how GP stakes fit into your diversification strategy. Concerns about concentration risk should prompt investors to assess how GP stakes complement other investments and contribute to a balanced and diversified portfolio. If considering investments in GPs with a global presence, be concerned about their expansion strategies. Understand how GPs are navigating international markets, regulatory environments, and cultural nuances. Global expansion can introduce additional complexities and risks.
In conclusion, GP stakes investments continue to hold strategic potential despite a brief slowdown. The market’s resilience, coupled with the strategic importance of these investments for GPs, points towards a promising future. As the industry anticipates a rebound in GP stake deals, investors and stakeholders alike are watching closely to unlock the growth potential embedded in this dynamic and evolving investment strategy.
