GP Stakes

Why invest in GP Stakes

• Stable and regular income stream.
• Overall growth in Private Markets speaks to growth at manager level.
• Upside through increased fund size, new strategy launches, etc.
• Access to diversified pool portfolio companies.
• Can create a closer relationship with underlying GPs, potentially generating fee rebates, co-investment, access to oversubscribed funds etc.

What are the main risks of GP Stakes

• Limited exit opportunities, as many private market solutions are not possible.
• Underlying managers’ inability to raise successor funds – especially in small or spinout managers.
• Failure for GP Stakes managers to raise funds – especially as many emerging managers launch.
• Increased competition and limited supply could come with risk/reward deprivation.
• A GP transaction can lead to changed incentives at the managers.

What characterizes GP Stakes?

• Industry/Sector: Financials / Generalist. Though the GPs must be characterized as financial companies, the underlying exposures vary between managers.
• ESG: Impact / Positive Screening / Negative Screening. It varies between managers, ESG factors are increasingly relevant in GP Stakes. Investors consider a GP’s commitment to ESG principles and their ability to integrate these values into their investment strategies and operations.
• Instruments: Investments in GP Stakes are often structured as equity or preferred equity. These instruments provide a share in the management company’s profits, such as management fees and carried interest, while generally not affecting control or operational decisions.
• Target Company Size: GP Stakes firm have typically focused on established, mid- to large-size GPs with a track record of successful fund management, but more firms are now focusing on emerging- and small sized managers.
• Return Profile: Earnings Growth / Multiple Expansion. The return profile for GP Stakes is often characterized by stable, recurring cash flows derived from management fees and carried interest. Earnings Growth is mainly driven by the GPs raising larger funds or adding new strategies. Risk/return profiles vary depending on the underlying managers’ size and life cycle stage (first-time fund vs. mature manager), as smaller managers tend to be spinouts or emerging managers. In contrast, large managers tend to have raised significant funds across various strategies. The investment horizon is typically long-term, and returns are generally less correlated with public markets, offering diversification benefits.
• Geography: GP Stakes investments are generally concentrated in developed markets with robust financial ecosystems, such as the United States and Western Europe. However, interest in emerging markets is growing as global investment strategies expand.

Question 1.  What is driving the evolution of the opportunity set in GP Stakes? 

Record Financial Group

The share of private markets in investment portfolios continues to expand. Investments managers specialising in private real estate, credit, equity and infrastructure observe not only an increasing set of opportunities but also play a vital role in society by enabling the energy transition, building (social) housing and providing a liquidity alternative to banks to name a few. As managers grow and launch new dedicated funds, part of their own capital is co-invested as “skin in the game” alongside investors. To spur growth, unlock new markets and provide working capital for General Partners, a minority equity stake is sold to external parties through an IPO or private placement to specialised firms. The opportunity set for GP Stakes is set to grow as the share of private capital is increasing, the number of GPs maturing and becoming investable rises, while diversification across strategies, sectors, geographies and economic cycles gain in importance.

Wafra

Wafra is a lifecycle investor in GPs, investing in established managers as well as next-generation managers. Wafra is seeing a lot of demand at both ends of that spectrum right now, both because of the challenges in the fundraising environment and because next-generation funds are seeing a unique investment opportunity that is ripe for them to launch into. The GP stakes strategy is a powerful solution and at the moment, there is a real need for solutions. GPs are looking for strategic partners to help them address various challenges such as limited liquidity and stagnating deal flow. In strong fundraising environments, we see GPs looking to increase GP commitments or launch new strategies. So, Wafra tendsto see robust demand across market cycles, but right now we are seeing exceptionally high demand.

Several factors suggest the volume of GP stakes transactions will persist in the near term, including the shifting PE fundraising market, continuing need to promote the next generation of investors and potential changes in tax policy. Additionally, we expect both majority owners of private equity firms (GPs themselves) and GP stakes investors to benefit from further consolidation within the asset management industry, as large market participants turn to acquisitions to supplement their investment capabilities.

Question 2.  What size, in terms of capitalisation, and how many managers can an investor expect to be exposed to through the strategy, and why is this beneficial to investors? 

Record Financial Group

Record GP Stakes is exposed to minority equity stakes in over 60 established private market asset managers with AuM ranging from $1bn to $193bn, and an average AUM of $32bn. The stability of recurring revenues combined with strong growth in private markets provides investors with robust cash flows (dividends) and returns. Being part of a $2.5bn GP Stakes investment programme that launched in 2016, investors in the Record GP Stakes fund benefit from economies of scale and co-investment prospects by lower fees and additional allocation opportunities. The large existing portfolio is accessible through an evergreen structure, meaning that investors benefit from existing allocations across vintages and economic/interest rate cycles. Furthermore, the low minimum investment of EUR 125k alongside quarterly liquidity provisions after three years, opens the investment class to a variety of investors considering entering the private market.

Wafra

Wafra has invested in 30 alternative asset managers through its next generation (“Constellation”) and established manager (“WSI”) strategies. An investor could expect to be exposed to approximately 8-10 alternative asset managers in the current Constellation vintage, and approximately 4-8 alternative asset managers in the current WSI vintage. Within the Constellation strategy, these managers range from newly launched firms to those with up to $5bn of AUM, and historically they have had an average enterprise value of $120mm at the time of Wafra’s investment. Wafra’s WSI strategy invests in alternative asset managers with more than $5bn of AUM, and historically on average, those managers had an enterprise value of approximately $2bn at the time of Wafra’s investment.

Constellation can be a differentiated platform solution for asset owners looking to add emerging manager exposure. Asset owners investing in Constellation gain exposure to multiple emerging asset managers, diversified in both underlying sector focus and geography across North America and Europe. In addition, asset owners have been able to form direct relationships with these managers through Constellation. The same is true of the WSI strategy, and additionally, Wafra maintains the flexibility to partner with both mid-cap managers ($5bn-$15bn AUM) and selectively partner with larger managers ($15bn+ AUM). Investing in lower and middle market asset managers widens exit opportunities to include selling stakes to other GP stakes investors once the asset managers have grown in enterprise value.

Question 3.  What levels of diversification can be found in your GP stakes portfolio, and why is this important?

Wafra

Through one commitment to a Constellation or WSI fund, asset owners gain exposure to multiple vintages of various asset managers diversified across asset class, underlying sector focus, and geography. This diversification allows asset owners to potentially mitigate their investment risk, and benefit from broad private markets growth across market cycles. Wafra has executed across private equity, credit, real assets, real estate and venture capital strategies for its GP stakes investments.

Finally, Wafra offers both the Constellation and WSI strategies to be a full-service provider for our investors when it comes to GP stakes investing. Between the two strategies, investors have access to GP stakes investing at every scale.

Record Financial Group

Diversification is a key differentiator of our GP Stakes strategy. As well as offering diversification across manager capitalisation, the fund is further diversified as the 60+ underlying managers the fund holds stakes in are active across private real estate, credit, equity and infrastructure. Moreover, they deploy various investment styles across different regions globally and their revenue streams stem from multiple vintages. This granular level of diversification plus the multiple sources of return of managers, including the long-term contractual nature of fees and the firm’s growth, provides investors with stable returns and limited downside. Record GP Stakes captures opportunities presented by ever-changing trends in private markets by allocating to a broad spectrum of leading private managers with strong funds, vintages and underlying revenue streams.