New Year, New Potential for GP Stakes Managers?

The private equity industry has seen significant growth in recent years, with record levels of capital being raised and invested. As a result, GP stakes strategies, which provide investors with ownership in the management companies of private equity firms, have become an increasingly attractive investment opportunity.

GP stakes allow investors to acquire ownership in the management companies of private equity firms, enabling them to benefit from the long-term growth of the private equity industry. GP stakes provide investors with access to the private equity firm’s fee income, which can account for a significant portion of the firm’s revenue.

For GPs themselves, the sale of a minority stake offers various advantages. It bolsters the balance sheet, supporting operational needs like strategic hires and technology investments. This approach facilitates scaling up by seeding new strategies or exploring additional business lines. The liquidity from the sale can be utilized to fund GP commitments amid fund growth. Moreover, selling a minority stake assists in succession planning, ensuring continuity, incentivizing the next generation of talent, and providing an exit strategy for founders, according to EY.

Pitchbook reported that GP stake deals faced a setback in late 2022 amid a broader decline in the private equity market. The total number of GP stake deals decreased from 29 (with a total deal value of $2.2 billion) in 2021 to 17 deals amounting to $1 billion in 2022.

Figure 1

Private equity investment in GP stakes

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Source: PitchBook Data

Deal activity for GPs faced a downturn in the first 10 months of 2023, with an 8.3% decline in deal count and a 25.3% drop in deal value compared to the full-year total of 2022, as per PitchBook’s Q3 2023 US Public PE and GP Deal Roundup Report.

Despite the initial slowdown, resembling the broader private markets, GP stakes deal volume rose in the early weeks of Q4/2023. Industry insiders express confidence in the market’s ongoing growth in 2024, driven by several factors.

Firstly, the private equity industry is projected to continue to grow due to an increasing amount of capital being raised by funds. According to EY, the number of PE transactions is still rising significantly from what looks to be the Q1 low – sponsors signed 93 deals totaling US$100 million or more in Q3, up 63% from the first quarter. 

Secondly, GP stakes can provide attractive returns compared to other investment opportunities. In the early years of the GP stake fund life cycle, limited partners (LPs) may receive returns of between 7-10%, as noted by PitchBook. In more mature portfolios, these returns might possibly reach the mid-teens.

Thirdly, the maturing of the private equity industry is creating additional opportunities for GP stakes investors. As private equity firms grow and mature, new management companies are created, providing additional opportunities for investors to acquire stakes in these firms.


Key Trends Impacting GP Stakes Managers

Several pivotal trends are anticipated to shape the GP stakes market in 2024 and beyond. Firstly, there is a growing emphasis on succession planning and management continuity within private equity firms. These firms increasingly aim to establish sustainable management teams capable of generating long-term returns for investors. This heightened focus on management continuity fuels demand for GP stakes as investors seek exposure to the enduring growth of successful private equity firms.

Secondly, there is a rising demand for transparency and alignment between investors and private equity firms. This demand is propelling innovation in fee structures and fund terms as investors seek alignment of incentives with the private equity firms. This trend is also propelling growth in the GP stakes market, as investors aim to access the fee income generated by successful private equity firms.

Finally, technology is expected to assume an increasingly crucial role in the private equity industry, presenting opportunities for GP stakes investors. Private equity firms are progressively leveraging technology to enhance deal sourcing, due diligence, and portfolio management, driving operational efficiencies and yielding higher returns. The growing significance of technology is generating novel investment opportunities for GP stakes investors, particularly as technology-focused private equity firms emerge.

The escalating significance of technology in the private equity sector is generating fresh investment prospects for GP stakes investors. The emergence of technology-focused private equity firms allows investors to tap into the growth potential of entities spearheading innovation and operational efficiencies within the industry.

In conclusion, there is a significant opportunity for GP stakes strategies in 2024, driven by the growth potential of the private equity industry, increasing demand for transparency and alignment, and the maturation of private equity firms. GP stakes provide investors with the opportunity to participate in the long-term growth and success of private equity firms, generating attractive returns in the process. As the private equity industry continues to evolve and mature, GP stakes are expected to remain an attractive investment opportunity for investors seeking exposure to the private equity industry.




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