GP Buy-In

What do you get in exchange for investing in the management company of a private investment firm? In theory, a lot. But to date, not much (table of GP stake sales included).

The idea that the general partnership entity itself might have some value was not present in the early days of the private equity industry. Deal guys came together to “bootstrap” investments and raise funds for what were then seen as one-off opportunities.

As the one-offs proliferated, the deal guys turned into managers of institutional capital, and their firms were increasingly seen as franchises with sustainable business models and long-term growth potential – the kind of businesses you might even want to invest in.

Today, by my count, there are at least 18 institutions that have invested in private equity management companies (see table below). This doesn’t represent a huge amount of collective experience, but they are 18 more case studies than existed in the mid-1990s, when general partners and their investors first began discussing ways to deepen their relationships.

Just about every large private equity firm has sold or is exploring selling a stake in its management company. The benefits of such a move can be summarized as:

• Giving the founding partners a chance to take money off the table
•  Creating co-investment capital and a new shareholder structure to retain non-founder talent
• Setting a value on the franchise, which nicely sets the stage for an IPO
• Locking in one or more huge limited partners as long-term providers of capital, making them  even more motivated to see the firm grow as a franchise

From the investor’s point of view, the benefits of buying a stake in a GP include:

• Investing in a trusted financial services firm that you expect to help grow
• Solidifying your status as a “most favored” LP with preferential economic terms and access
• If the investor also is a financial services provider, possibly unlocking synergies with the private equity franchise

In theory, these mutual benefits are compelling, but in practices there are not yet any clear case studies showing an investor in a private equity management company reaping a windfall, other than the founders of said management companies.

CalPERS and Abu Dhabi seem poised to gain both impressive capital gains and bragging rights from their investments in Apollo Global Management now that it has gone public. The investments are reportedly set to hit break-even at $19 per share, which is where Apollo debuted (it recently traded at $18 per share).

China Investment Corp. was chagrined to see its investment in Blackstone disintegrate with the market swoon.

A partnership between Putnam and Thomas H. Lee has yet to bear significant fruit.

Even the idea that Apollo might cut CalPERS a break on fees only gained serious form in the wake of the Al Villalobos scandal, which made Apollo’s fee give-backs seem rather punitive.

Over the next economic cycle many – possibly most – LPs listed below will look prescient for having bought into the innovative Wall Street dynamos that many of these private equity firms are. But no one will be bragging about a quick flip.

Stake Feast: Investors That Bought Into Private Equity Firm Management Companies

Source: Privcap