Leonard Green execs reap payouts in Blackstone deal

  • About 30 professionals participated in the cash-out
  • Liquidity event includes next generation of leadership
  • Blackstone bought equity from private shareholders

Blackstone Group’s minority investment in Leonard Green & Partners represents a payout for around 30 professionals at the firm, sources told Buyouts.

The minority deal, for a less than 15 percent stake in the management company, was structured as a secondary investment, two sources said. This means the firm is buying equity from existing private shareholders, who get the proceeds.

“A secondary deal is … someone selling existing equity to you and getting cash in return,” said an investment professional who works on minority-stake sales. “The cash is not staying in the business; it’s going out to whoever is selling.”

Different kind of deal

This type of minority transaction is different from a primary deal, in which a third party invests in the firm itself, putting capital on the balance sheet for initiatives like growth of the firm into new strategies, sources explained.

While the investment represents a cash-out for professionals, no one is leaving the firm because of the deal, sources said. LPs have expressed concern to Buyouts that minority stake sales could lead to investment professionals cashing out of the business and losing focus on investing capital.

LPs were particularly attracted to the cash-out aspect of the Leonard Green deal for younger executives, those who represent the next generation of leadership at the firm, one of the sources said. Proceeds of the minority investment are getting wide distribution to around 30 professionals, two of the sources said.

Younger executives can use the cash to help fund their commitments to future funds, a second investment professional who works on GP-minority-stake sales said.

GP commitments can prove burdensome to younger professionals who have not yet amassed wealth like older managers and founders. That’s especially at firms that are growing into new strategies with different fund families, the second investment professional said.

“[Senior guys] have no problem making the GP commitment. The next-gen guy just promoted to partner, he may be personally fairly illiquid,” said the second investment professional.

The valuation of the deal is not clear. The investment was Blackstone’s first in a private equity firm. The firm made the investment through its $3.3 billion Blackstone Strategic Capital Holdings fund raised in 2014, which has made past investments in hedge funds.

More and more stake sales

GP-minority-stake sales have been on the rise as firms raise money to pursue the strategy. Such deals typically are structured as secondaries or primaries – or they can include aspects of both types of structures.

Neuberger Berman-backed Dyal Capital is the leader in the market, having closed a $5.3 billion fund in February to pursue minority stakes in PE firms. Dyal is already back in market targeting at least $5 billion, with no cap, for its next pool. The bulk of Dyal’s deals are primary investments.

Others in the space include Carlyle Group’s AlpInvest Partners, Hycroft Capital and GP Interests, launched by former Morgan Stanley banker Mark Bradley.

Action Item: Check out the PE HUB podcast on minority-stake sales: http://bit.ly/2tK7VGp

John Danhakl of Leonard Green speaks at Buyouts Texas 2014.