Back to School: LPs not quite sold on funds buying GP stakes: survey

  • Nearly two-thirds of LPs unlikely to consider funds buying GP stakes
  • Four in five say GP-led secondaries here to stay
  • Funds of funds still attractive for specialist exposure

Most LPs have not invested in funds targeting GP stakes and are unlikely to do so.

That was the response of 64 percent of institutional investors polled by Coller Capital for its latest Global Private Equity Barometer. Seventeen percent said they’ve already invested in such funds and another 19 percent will consider doing so.

The strategy of buying minority interests in management companies has been gaining steam of late, driven in part by generational transitions at established firms. Dyal Capital Partners, a unit of Neuberger Berman, raised $4.6 billion as of April for its fourth fund dedicated to such transactions. Dyal’s LPs have included Alaska Permanent Fund and Minnesota State Board of Investment, which approved a commitment of up to $250 million to this latest vehicle.

Other firms active on the buy side include Blackstone and Goldman Sachs. GPs like Riverside Co, Vista Equity Partners and Leonard Green & Partners have sold stakes to put cash on the balance sheet, fund new platforms and provide liquidity to partners.

Some investors have reservations about these deals, including uncertainty about exits and the question of conflicts for existing LPs. In 2016, New Mexico State Investment Council declined to commit to a Dyal fund because of such concerns.

Another newer transaction is set to go mainstream: Four of five LPs say GP-led secondaries “will become a routine part of the PE landscape.” Deal volume has surged, showing compounded annual growth of more than 50 percent over the past five years, Greenhill & Co reports.

In an apparent vote of confidence in the maturing industry, 62 percent of investors say innovation in PE is still strong. But the North American buyout market is seen as oversaturated, with 62 percent of LPs saying too many GPs are chasing too few deals. Half of investors say the same about Europe, but only a quarter feel that way about Asia-Pacific. Nearly a third say the latter region could use more high-quality GPs.

Funds of funds are still attractive to a solid majority of respondents, with 71 percent endorsing them as an option. Most of these LPs are seeking exposure to specialist strategies — emerging markets, niche investment themes, venture capital — with less than a quarter viewing funds of funds as a good way to invest in North American and European buyouts.

Action Item: Read Coller Capital’s full Summer 2018 Private Equity Barometer here: