GP stakes – the low down

This small corner of the private markets investment universe has faced some challenges of late but, say long-standing investors, GP stakes remain an attractive option in what is an evolving area of the asset class

GP Stakes: An revolving market?

For many years, selling a GP stake was one of the few ways for fund managers to raise capital to invest in their business, develop their franchise and product suite or to help founding partners take some capital out of their business.

That was before private markets started consolidating in such a big way. In 2021, for example, there were 40 GP stakes deals in US private equity managers and 70 acquisitions; in 2024, there were just 21 GP stakes deals in US managers and 111 acquisitions, according to PitchBook figures. GP stakes now have some serious competition.

So does this market still have legs? Long-standing GP stakes investors certainly seem to think so. Here's why.

What is the main challenge for GP stakes in today's market?

Increased market consolidation
Declining number of GP stakes deals
Competition from acquisitions

The recent wave of consolidation may not be as negative a development as it may first appear. "Consolidation is a feature of the industry today," says Ali Raissi-Dehkordy, Global Co-Head of Petershill, Goldman Sachs Alternatives. "We've always been very aligned with a GP's ultimate decisions on the strategic path for their firm. The reality is that the best firms – and these are the kinds of firm we invest with - are attractive to consolidators, but the decision is ultimately one for our partners to make. For us as an owner in these businesses, it can be an upside, another exit mechanism."

Competition in GP stakes has pushed up valuations in some areas... "We are seeing more congestion on the established manager side," says Adel Alderbas, Chief Investment Officer at Wafra. "That's not negative, it's a natural evolution and a sign of increasing maturity as it becomes more acceptable to sell a GP stake. It has meant that valuations have crept up here, but we see opportunities in the emerging and early-stage managers. Among other things, it's a great way to ensure we're not overpaying in this environment."

Key market trends

Downward pressure on pricing as fundraising slows, with more realistic modeling assumptions

Innovative deal structures emerging to bridge valuation gaps, including preferred securities

Multiple exit options now available in the maturing GP stakes market

Downward pressure on fundraising

… But there is some downward pressure as fundraising has slowed. "We're seeing better pricing today than previously because buyers and sellers have become more realistic on modelling assumptions," says Michael Shedosky, Co-Chief Investment Officer, Azimut Alternative Capital Partners. "These are based not just on multiples or discount rates – a lot of the time you are trying to forecast future fund sizes, duration of time to an exit, new business lines, and so on. People have become more conservative because some buyers have seen some of their managers stumble a little. Also, GPs recognise today that they don't have the right to ask for 50-100% fund growth. Everyone is being more reasonable."

Innovation in deal-making

Players are innovating to get deals across the line… Even if all sides are being more reasonable, bid-ask spreads are an issue. But, says Shedosky, new tools are emerging to help buyers and sellers reach agreement. "We're seeing the creation of preferred securities to bridge a valuation gap," he says. "It's an innovation that you're seeing more and more, given the uncertain environment. As a buyer, preferred securities are a way for me to trade some upside for more downside protection. I get enhanced cash flows, some sort of liquidation preference and then I convert to a lower amount of equity."

Anthony Maniscalco, Head of Strategic Capital Group at Investcorp, also says that structuring has become more commonplace. "Our assumptions on businesses have been reset to become more conservative over recent times," he says. "We don't assume you are going to double your fund or raise one every two years. Discount rates have changed and where we might not have agreement, we use earn-outs, earn-ins, or we carve out legacy portions of the carry. We're trying to be creative to solve GPs' problems and use that as an opportunity build downside protection for our investment."

...And to exit existing investments

"When I started in the business back in 2007, the biggest question from investors was always: how do I get out?" says Maniscalco. "That question never changed for many years, but in the past five years, we've seen bulk sales, individual sales, IPOs, strip sales, secondary sales. These days, we could sell to one of the larger players in the market because there are now tiers in the GP stakes market, or management might want to buy it back. Our plan isn't to own the asset for 100 years; it's at some point to find a buyer or provide liquidity in other ways."

Our assumptions on businesses have been reset to become more conservative over recent times

Anthony Maniscalco, Head of Strategic Capital Group at Investcorp

New investment themes are emerging

To date, many GP stakes deals have focused largely on US private equity firms, but this may be changing.

"We are very thematic and we look at what's happening in the markets and the geopolitical environment," says Maniscalco. "We like Europe and we're spending a lot of time there because capital is flowing there. Our GPs in the region have been able to raise more capital than in the past. We're also looking more at private credit, where continued bank retrenchment means capital is flowing to asset-based lending, distressed, special situations and sponsorless lending. In buyouts, we're looking to sector specialists and value-oriented strategies – we look at where the puck is going to be versus where it is right now."

Volatility is also creating opportunity for some. "In an environment of macro uncertainty and dislocation, we think it's a tremendous time to be building asset managers," says Stephen Prince, Chief Executive Officer at Tetragon. "We're excited by areas such as legal assets, a private credit model that builds diversified pools of legal assets, structuring them to create non-binary outcomes with sustainable credit-like returns that are uncorrelated to credit and equity markets. We're also excited about biotech, where 30% of public companies are trading below cash right now."

Want to hear more from Stephen Prince, CEO, Tetragon and GP stakes?

Watch our exclusive backstage interview from SuperReturn International to learn more about the evolving world of GP stakes: bit.ly/4fAP877

The market is stratifying as it matures. "The industry is continuing to evolve," says Raissi-Dehkordy. "We're pleased to see more participants in stakes – but there are many different strategies being pursued, from small cap, early-stage managers to mid-market managers seeking capital for growth and large cap, later stage managers. Everyone approaches the market slightly differently; our focus has been on leading mid-market firms since the sector's inception 18 years ago."

Meanwhile, there is no LP consensus on where GP stakes fit in their portfolio. "GP stakes have elements of credit because of the annual yield derived from management fees," says Shedosky. "So some LPs put this in their private credit bucket." Others consider GPs stakes as more of a secondary strategy.

"That's because a lot of the underwriting is on past funds with portfolio companies and you need to approximate the carry you will earn in the future from these GPs," he says. The most common allocation, however, is from the private equity bucket. "That's pretty simple," says Shedosky. "You're buying a minority interest in a business – it just happens that it's a private equity fund manager – and you can make private equity returns."