The widespread use of certain financial ’technology’ is transforming, and together with its knock-on competitive effects, will continue to transform the alternative asset management industry – Hal Ritch
Q: Which trends / dynamics are impacting the alternative asset management industry?
While the list is long and likely includes everything from macroeconomic factors to regulation to ESG, we believe the widespread use of certain financial ‘technology’ is transforming, and together with its knock-on competitive effects, will continue to transform, the alternative asset management industry. This financial ‘technology’ informs a range of strategic opportunities available to alternative asset managers, including, but not limited to:
- mergers and acquisitions
- GP stake sales and non-dilutive management company-level financings (collectively, GP Stake Sales and Financings)
- fund-level financings (to be discussed at greater length in future pieces)
These transactions are altering the way firms fund GP commitments, fuel growth, transfer ownership, plan for succession, and compete for and retain talent, among many other things.
We expect the current macro environment and its impact on fundraising and deal activity to drive continued growth in GP Stake Sales and Financings, as well as strategic business combinations.
The impact of the macro environment on this market is discussed at greater length below.
Q: How has the GP Stake Sale and Financing market evolved over the past several years?
Although GP Stake Sales and Financings have received increased media attention over the past several years, the strategy has existed for decades, with the first large private equity transaction being CalPERS' acquisition of a 5% stake in The Carlyle Group in 2001.[i] In the years following that initial transaction, raising outside capital at the GP-level was only an option for the largest mega-funds, with IPOs being the most common route chosen.
Within the past decade, GP Stake Sales and Financings have become available to smaller managers, as dedicated investors have entered the space. While these dedicated funds were initially raised to invest in hedge funds, other types of alternative asset managers have overtaken them due to the stability of their AUM as compared to hedge funds.
Over the past several years, the industry has seen an influx of new investors and capital, causing the market to become even more competitive and sophisticated. Innovative transaction structures, including non-dilutive, GP-level debt or so-called preferred equity or waterfall preferred equity have also emerged to meet the varying objectives of alternative asset managers of all types and sizes.
Q: What is the strategic rationale of GP Stake Sales and Financings for GPs?
GP Stake Sales and Financings are very bespoke transactions that can be tailored to the specific needs and objectives of a particular GP. At a high-level, the rationales for these transactions can typically be characterized as either financial, strategic, or both.
- Financial rationale: transaction proceeds can be used for a variety of applications that include funding GP commitments, growth capital, liquidity, and ownership realignment. There are also frequently tax efficiencies associated with transactions of this nature.
- Strategic rationale: while the strategic benefits are more common in equity transactions (GP stake sales and control transactions), they can include valuable services like fundraising support, access to large purchasing programs, new product development, strategic consulting, operational and administrative support, and actual LP commitments, among others. Competition has caused the list of value-added services provided by investors to expand as new investors have entered the space.
Q: Which characteristics make a GP a good candidate for financing transactions of this nature?
While specific target characteristics, such as size, maturity and growth trajectory can vary based on the type of transaction, investors are generally targeting managers with a proven track-record and strong investment performance. As would be expected, GP stake investors tend to focus more on proven, sustainable competitive advantages and future growth in AUM, while providers of non-dilutive financings care more about the current funds and their related portfolio investments.
Managers of all types and strategies can be candidates for transactions of this nature including, private equity, credit, venture capital, infrastructure, real estate, and secondaries. From a size perspective, these transactions can be utilized by alternative asset managers of varying size and maturity, albeit GP stake sales are more common for larger, more mature managers.
Q: How does the current macroeconomic environment impact the GP Stake Sale and Financing market?
The current macroeconomic environment is a potential catalyst for increased activity. In this volatile market, GPs are using these financings for both defensive and offensive purposes.
- On the defensive side, GPs are raising capital to fund future GP commitments to offset potential liquidity constraints arising from delayed exits and carried interest distributions. Others are aligning themselves with strategic partners that can provide fundraising support during an increasingly challenging fundraising environment. While the strategic rationale for acquisitions varies by situation, a common theme has been that buyers are attempting to grow their AUM by expanding their product offerings and / or geographic reach.
- From an offensive perspective, some GPs are raising growth capital to make opportunistic hires and / or seed new strategies to capitalize on market dislocation. In many cases, GPs are also employing these financings to increase their GP commitment percentages to appeal to the LP community in a more complex and challenging fundraising environment.
Q: Which factors are driving consolidation in the alternative asset management industry?
The challenging fundraising environment is likely one of the biggest contributing factors to GP consolidation. Tight fundraising markets tend to favor large GPs, providing them with attractive opportunities to acquire smaller, more specialized managers that can then be integrated into their platforms. Insurance companies have also been active buyers of alternative asset managers, as they have used M&A to build out in-house investment capabilities.
From the perspective of a seller, alignment with a large strategic partner can help drive AUM growth while alleviating the pressures and difficulties associated with fundraising.
Q: How do LPs view GP Stake Sales and Financings?
As these transactions have increased in prevalence, many LPs have become more accepting of them. Furthermore, many LPs themselves are invested or have expressed interest in investing directly in GP stakes or indirectly in GP stake funds or other GP financing funds, as these strategies can provide investors with attractive cash flow yield and current income.
Q: What are common misconceptions of the GP Stake Sale and Financing market?
The nascency of this market has led to many common myths, a few of which are outlined and clarified below:
|
Myth |
MythBuster |
|
In many firms, there is not much enterprise value at the management company |
In fact, at a certain scale, valuations for alternative asset managers are frequently robust and include value for both extant and future funds |
|
Investors receive governance rights and operational control over the day-to-day operations of the firm |
In fact, investors are typically passive in nature and, therefore, do not have influence over the day-to-day operations, including investment decisions |
|
All GP financing transactions result in ownership dilution |
In fact, a variety of non-dilutive financing structures exist and are commonly used by GPs |
|
Public disclosure is required of all GP financings |
In fact, many GPs choose not to publicly disclose their transactions for a variety of reasons |
Q: Where is DC Advisory’s focus in this market?
DC Advisory has a dedicated GP Strategic Advisory group that specializes in advising alternative asset managers across the entire spectrum of transaction structures, including:
- non-dilutive financings, both at the management company and fund-level
- GP stake sales
- strategic business combinations
Our GP Strategic Advisory group has experience with alternative asset managers of all types, sizes, and geographies.
To the extent you have any questions or are interested in learning more about this dynamic and rapidly evolving market, please contact our GP Strategic Advisory group >
For important information about our insights and publications read our full disclaimer >
Source(s)
[i] Calpers Buys Stake in Carlyle Group For $175 Million, Invests in Funds - WSJ
