Partner Sells GP Stake
How have others reacted to a founding partner selling a stake in the management company to a GP stakes investor? This has not happened at my firm, but on the surface I think it would make me want to quit. Can't imagine having some unrelated "owner" chewing away dollars that could be compensation to the folks in the trenches, and running the firm like a business. "You get some of the carry" doesn't seem compelling at all.
Has anyone ever "revolted" when this happened? Hoping the answer is yes.
For all of the rankings and back and forth about “prestige,” this topic gets very little air play on this forum. Understanding the succession dynamics should be a huge diligence item when choosing a firm and is on par with returns and fundraising momentum in regards to career comp potential. The old school way is to treat the management company like a law firm partnership and gradually pass on ownership / carry; however, many founders have chosen IPO / minority sales vs. this approach.
It obviously sucks but it’s just kinda the mechanism for partners to get cashed out. Why give up management fees + carry to some new partner (for nothing) when you can get paid? Completely understand both sides of the coin but long term I think the GP stake market dries up/dies unless a broader secondary market develops. Too many stakes being held by folks like Blue Owl, Petershill, Hunter Point, Bonaccord for all these names to receive liquidity via IPO or sale to larger entity. Bonnacord in particular is an interesting example given there seems to be minimal interest in MM PE firm M&A (at GP level).
I believe we'll see a trend of this happening more and for those that do sell, it will drive turnover and spin-outs. Frankly the GP stakes market seems like a huge bubble that inevitably will come crashing down. A PE firm's assets are its people. People won't stay if a large chunk of the economics are no longer available to the next gen that helped build the firm. They'd rather take the risk of starting their own fund or joining another firm with significantly more upside. That turnover will impact fundraising and before long, the firm that sold its GP stake will close its doors. We are in the early stages of this playing out.
I mean GP stake is really just PE strategy applied to PE funds so it's hard to criticize it while being in the industry. And as for PE acquiring a business, there are a lot of ways to incentivise the key people to stay. Based in Europe so could be less true in the US but the industry is going in a consolidation phase whether we see both PE funds or M&A boutiques being acquired by bigger peers and GP stake is just a step in the middle, usually being minority stake.
I understand the view of seeing GP stake investors as just taking a share of profit for no effort but pretty much as secondaries, it has multiple underlying uses such as growing the BS of the fund (eg to finance the opening of a new office or a new strategy), giving more credibility to the fund in its fundraising and more reach to new LPs (eg a US GP stake investing in a Europe only PE fund) or even securing capital allocation from the GP stake in the future funds (wouldn't apply to a GP stake-only strategy but in most case GP stake is a strategy of a global IM)
And if you think of the consolidation of the market, GP stake might be the best way for PE funds to keep their independance. If you see GP stake as taking control of the PE firm, then there are obvious middle/back office synergies and the size could justify new operating function, especially data analytic, transformation & AI roles
Lol. None of your arguments are very compelling relative to the downsides.
LMM PE should be a confederacy of Partners, not a corporation. That's the social contract. That's why we all work so hard. Get rid of that and the incentive to move up dries up. This is just very greedy people climbing up the ladder and pulling it up behind them.
I would consider GP stake investor as on of the partners to some extend, sure if they come fully passive I get your point, but there has to be some trade-off and they bring something to the table even though they only have a minority stake.
Goal for the vast majority of PE is to grow AUM unless you are an absolut sector/size specialist. Have seen it happening such as AUM grow > more strategies > more seats for new partners. A PE firms is not only the investment, have fun operating with only the investment team and no support functions, GP stake is a way to strenghten these without having to put more money in the GP.
It is quite hypocrit to deny GP Stake for some social contract story while you would have no problem investing in business services companies which also have a partners-based structure. The industry is getting more structured, we have to cope with it.
This view is off the mark for many reasons but the most compelling evidence is that the GP stakes funds that have been around long enough to have a real track record have largely underperformed. Blue Owl GP Stakes Fund I and Fund II are 4th quartile funds with a ~1% and ~9% IRR. In time, it will become clear that this strategy is in a bubble and not viable over the long term.
I don’t get it at all. Have seen some of these fund’s decks and the universe of potential investments is tiny compared to more traditional industries… like 2-3k potential managers and I’d guess a fraction of that is even worth investing in. Plus, they have largely used financial engineering to generate exits, NAV loans and now CVs… I’m in secondaries advisory so I guess that’s only good for my business.
Not to mention, a lot of LPs hate it when they see their GP sell a stake because usually there is a proliferation of strategies that takes the GP’s eye off the ball of their flagship and performance sinks after that. Partners cashing out reduces their incentive and losing a good chunk of carry for younger partners reduces their incentive.
The funds do have solid returns with a unique yield + capital appreciation aspect so I get the appeal for large pensions and SWF… I just don’t see how much larger the industry can get. Not to mention, the pace of firms selling stakes really seems to have slowed down in the past year.
Agree with this take... for those of us who went into PE with the idea that it would be "entrepreneurial", having senior partners sell a material stake in the GP is demotivating.
I get the talk track that the new capital will be used to seed new strategies, bolster the GP's B/S, etc, but from what I've seen it's usually just a partial cash out play... and not that those other uses of capital would benefit those of us at the junior to midlevel anyway.
I think the effects of this are:
(i) PE will continue to corporatize but will remain a high paying job; this will turn off the entrepreneurial types and attract more corporate ladder-climbers (not good or bad, just an observation),
(ii) PE will continue to get more saturated, as GPs focus on asset gathering regardless of whether a strategy can handle more capital because they see more value from their GP stake (and maximizing mgmt fees) vs actual carry in the funds,
(iii) related to (i) and (ii), LMM PE will continue to get more competitive as the more entrepreneurial types from bigger funds start their own funds or independent sponsors focused on the LMM, and
(iv) underscores that it's important to be an owner... carry is no longer enough, you need to have a stake in the core business (just like at any other type of company) to really have a seat at the table and have a chance at true generational wealth
On the LP side of things and if a firm has taken GP stakes for anything other than to fund GP commit I'm out. Funds who are on their 8th fund and selling a stake are the MP's cashing out and you just can't spin it any other way.
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