- Market characterized by unclear path to exits, high prices
- LPs attracted by regularly recurring revenue
- Dyal raising $5 bln to acquire stakes in GPs
The market for stakes in the management companies of private equity firms is growing riskier as limited partners pour more money into the strategy, said panelists speaking at Buyouts Insider’s PartnerConnect Southwest conference in Austin.
The management teams at PE firms like Riverside Co and Vista Equity Partners in recent years have sold minority shares in their management companies to fund a variety of projects, including expanding their platforms and strengthening their ability to commit to future funds.
Several asset managers are raising new funds to acquire minority stakes in PE firms, including Goldman Sachs and Neuberger Berman’s Dyal Capital Partners.
The strategy, however, has its challenges. The path to exiting these investments remains relatively undefined, and taking on a minority investor could present conflicts for a firm’s existing LPs. New Mexico State Investment Council turned down an investment in a Dyal fund last year after board members raised similar concerns.
“I think it’s a land grab,” said TorreyCove Capital Partners President and CEO David Fann, who spoke on the panel.
Some challenges stem from a lack of firms whose track record and longevity are worthy of investment, said Fann. “If you’re not getting into the best name, their strategy isn’t viable,” he said. “No one is saying, ‘I need to buy stakes in fourth-quartile managers.’ The money’s just not there.”
Furthermore, the market’s grown frothier as fundraising escalated and the number of proprietary transactions declined, said Russell Valdez of Wafra Investment Advisory Group, a Kuwaiti sovereign-wealth fund. Certain investors, such as Wafra, can still find opportunities acquiring general partner stakes because they aren’t confined by the strictures of a traditional close-end vehicle, he added.
Even so, many LPs are enticed by the strategy. Acquiring a stake in a PE firm often entitles the purchaser to a share of the management fees paid by the firm’s LPs, as well as a portion of whatever carried interest the firm’s portfolio companies generate.
Minnesota State Board of Investment on Dec. 5 approved a commitment of up to $250 million to Dyal’s new fund. Dyal Capital Partners IV is targeting $5 billion and “expects to generate attractive returns solely from cash flow” generated by its underlying portfolio companies’ fee and carry revenues, a Minnesota memo shows.
Dyal’s previous fund, a $5.3 billion 2016 vintage fund, is marked as netting a 13.1 percent internal rate of return and 1.2x multiple, the Minnesota memo says.
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David Fann, Chris Puscasiu and Russell Valdez speak about GP-stake sales at PartnerConnect Southwest on Dec. 5, 2017. Photo by Sam Sutton, Buyouts.