Dyal and Petershill IPOs pave the way for a new area of investing
The market for investing in GPs themselves rather than only the underlying assets has evolved at a phenomenal pace over the past five years as institutional investors continue to seek new ways of participating in the success and growth of private markets and their underlying strategies.
The recent listing by Dyal Capital and now Petershill’s IPO mark an important maturation of an asset class that did not really exist just a few years ago. The high profile and success of these firms, as well as a compelling investment thesis, have drawn a lot of interest from the investment community who are excited to find a new way of investing in GPs. One of the most interesting outcomes of this rapid success has been the opportunities that have opened up for emerging managers to not only achieve successful exits, but also secure growth capital investment.
In general, owning part of an asset manager provides access to attractive returns through profit sharing (management and performance fees), much better alignment of interest with the manager, and valuable exposure to potential co-investments that have been vetted by experienced teams.
Asset management firms like Dyal and Petershill are predominantly focused on the large-scale, mature segment of the market. That strategy has flourished as the alternative asset management industry has come of age. At the same time – during a period of lower interest rates – investors have been looking for yield combined with higher returns.
Lack of exits
GP-stakes strategies focusing on mature and established asset managers were able to identify some opportunities and grow as an asset class even though not many (if any) exits have been realised. In many cases, no exits are planned given that investments are coming through perpetual investment schemes and, as a result, yield is the primary driver.
As with every investment strategy, market conditions, new players and capacity constraints drive changes in the investment thesis as market participants seek out new opportunities to deliver returns.
The pool of large GPs with mature characteristics that are willing to sell a stake is limited, with few of these types of GPs left in the space that have yet to part with a stake in their business. Furthermore, an increasing number of LPs investing in GP-stakes strategies are looking for returns delivered by future exits rather than just dividends. Predominantly targeting large established managers is proving increasingly challenging as more players are moving into the space and auction-like processes are becoming more frequent, driving up prices and potentially reducing return.
LPs are also starting to have valid concerns. Will the change of GP ownership disturb the equilibrium of the team that remains behind and is the capital injected into the target GPs being used only towards the GP participation obligations of current and future funds?
Generational transition from legacy partners and/or founders to new talent does not always happen smoothly and a GP-stakes investment can lessen the alignment between GPs and LPs. A growing number of LPs are now questioning if it is a good strategy to keep buying stakes from partners who are leaving the firm they founded, particularly given that they always know more than any potential buyer.
It is clear that the GP-stakes market is evolving towards growth or emerging GPs, where higher returns can be achieved, and founders are more willing to invest further into their business rather than looking for an exit.
Barriers to entry are high for those solely focus on investing in large established managers. Significant capital is required. On the other hand, the growth or emerging segment, which is potentially the most rewarding, typically has more innovative structures and requires more investment in terms of time and experience, rather than just capital. An ecosystem of infrastructure and business development support is very important.
There are multiple benefits to investing in growth or emerging managers that have good track records and have worked together for a long time. Investment in these teams can offer diversity to a portfolio in an efficient way, with exposure to more thematic differentiating strategies.
They rarely have the succession issues of the more mature managers as they are unlikely to be looking for a quick exit so they are more fully aligned with their investors. A GP-stakes investor in emerging managers has all the advantages of an early-stage investor, with the potential to achieve higher equity stakes, higher returns, and the highest alignment.
With the almost open-ended opportunities in this segment of the market, investing in and creating new managers generates a powerful ripple effect. The result is an ecosystem of emerging managers that are pursuing different investment strategies and are at different stages in their growth.
The alternative investment market, specifically emerging managers, has a phenomenal opportunity to capitalise on the market awareness and capital raising success of Dyal and Petershill. The GP-stakes market is here to stay and there will be a whole wave of new and innovative emerging managers launching and growing in its wake.
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