Rise in GP stake sales as investors tap into alternatives

There has been an increase in General Partners (GPs) of private capital funds selling stakes in themselves over the past two years, as investors clamour to tap into this fast-growing market.

Stephen Pike, corporate and M&A partner at Macfarlanes, said that the law firm has worked on many acquisitions of private capital investment management firms and has seen an uptick in activity over the past 24 months.

He attributed this to “herd mentality” as more deals are being made, particularly in the US, combined with the attractiveness of the market compared to other investments.

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“People have seen the general rise and growth of these asset managers and have seen it as an alternative investment they can make when other markets aren’t as attractive,” Pike said at a Macfarlanes private capital press roundtable.

“Incoming investors see an opportunity to tap into this area of the market which wasn’t as available to them, and are aligning this with generational change.”

Pike noted that many private capital managers experienced strong growth in the 1980s and are undergoing “generational change” at this stage in their business whereby they are open to acquisitions.

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Additionally, some investors are motivated by diversification, Pike added.

“[Large institutional investors] have a particular strategy that perhaps is very developed and exposed to different geographies compared to a private capital manager,” he said.

GP stake sales can vary from a 20 per cent minority holding to a majority acquisition from day one, with the ability of call option structures to take over 100 per cent of the firm over the life of the transaction.

Pike said that deals are becoming increasingly complex and are “unbelievably bespoke”, as you have to manage the interests of the founder, the firm’s ‘rising stars’, current investors and incoming investors.

“They are all aligned in wanting the business to flourish but there are conflicting interests about what they want out of it…and what the future’s going to look like,” he said.

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