What exit? GPs investing in other GPs are in it for the long haul

If alternative investment managers taking minority interests in other such firms were a marriage, there wouldn’t be a prenup.

General partners taking non-control stakes in other private markets firms has boomed in popularity and seems to be here to stay – especially for those firms that have sold a portion of themselves, as these deals are not arranged with a quick escape hatch.

“Exit planning is not a priority when structuring these investments,” Jeff Hammer, co-head of Houlihan Lokey’s Illiquid Financial Assets practice, told Private Debt Investor. “Minority stake investors seek primarily to create steady cashflow streams that can be distributed to investors over a long period of time.”

Even the way the investment vehicles are structured hints at a sustained presence.

“All of the major players in this space have investments structured to be permanent capital vehicles,” an investment professional active in the space said. “The best way to align yourself with a manager is to be their permanent partner. By the deal’s terms it doesn’t have any end date; there’s no date by which your interest goes away.”

The strategy seems to be a win-win for limited partners and credit managers. Investors get a cut of the GP fees – both management and carried interest. The GPs being invested in can get capital for product growth or expansion, executing succession plans and larger GP commitments to funds.

Among three of the major GP-minority-stake investors – Blackstone, Goldman Sachs’ Petershill programme and Dyal Capital Partners – there have been very few exits. All three firms declined to comment for this article.

Neither Dyal nor Blackstone have had any exits from their current portfolio. Goldman Sachs, however, sold a portfolio of minority stakes in hedge funds to Affiliated Managers Group.

Lehman Brothers once had a team that took minority stakes in hedge funds; there were multiple exits from those funds, both pre- and post-Chapter 11 filing.

Before Lehman Brothers submitted its bankruptcy petition, GLG Partners went public and Marble Bar Asset Management sold itself to EFG International, both in 2007. Among the exits during the Chapter 11 case, Hillspire, the family office of former Google executive Eric Schmidt, purchased the minority stake Lehman had held in the DE Shaw Group.

“[These managers] want to hold [the minority stakes] for a long period of time,” a second market source told PDI. “What’s important is the type of capital you raise; if you don’t control the assets like you would in a private equity fund, you shouldn’t be relying on some type of exit.”

In the case of individual limited partners wanting an exit from a fund, stakes could be sold on the secondaries market, but there have been few of these transactions, sources said.

There has been at least one such exit, according to PDI sister publication Secondaries Investor. The Alaska Permanent Fund Corporation sold a portfolio of private equity investments to Ardian that contained a commitment in the Blackstone Strategic Capital vehicle.

“It’s in its relative infancy,” Anthony Maniscalco, a managing partner at Investcorp and Head of GP Investments, said of the strategy. “As people get on to multiple vintages of these funds, it will grow more broadly within the secondary market.”

There remain other exit possibilities that are more theoretical. Investcorp’s Maniscalco noted that there is potential for a marketplace to buy and sell individual GP stakes among those firms making the minority investments. Houlihan Lokey’s Hammer mentioned the possible securitisation of fund portfolios, should there be a critical mass within a single vehicle.

Post-global financial crisis, there have been myriad changes to alternative assets, and many questions around those developments have yet to be answered. How, and if, liquidity options for the GPs investing in other GPs will develop is just one more to add to that list.