GP Stakes: A New Asset Class in Private Markets

GP stakes are a new phenomenon in the private markets ecosystem, fuelled by the M&A we've witnessed in the space over the last couple of years. Investors are increasingly considering private equity firms as operating businesses in their own right.

In this article, we'll discuss how GP stakes became an asset class in itself, the drivers behind this type of investment, and how family offices can properly take advantage of it.

Like the secondary space, GP stakes have been around since the "birth" of private equity, yet only started receiving proper attention after the GFC, when dedicated funds were created around the strategy. Blue Owl alone has raised approximately $40 billion for GP stakes strategies.¹

Mechanism of GP stakes

GP stakes are fundamentally a simple business model: acquire a minority share, often between 10% and 30%, in an established asset manager to benefit from its revenue streams and valuation growth.

These stakes, due to their minority nature, are often non-voting and non-controlling, effectively making them passive investments.

Something worth noting is that investments are being led by the same categories of investors we're seeing in the wider M&A space:

• Strategic acquirers: Typically large wealth managers, asset managers and banks. Their edge is distribution. By taking a stake in a GP, they can plug that manager's products directly into their own client base, rather than continuing to rely solely on third-party providers for alternative allocations. It's a way to convert existing distribution capacity into a direct share of the fee economics.

AIA Group's minority investment in GLP Capital Partners in 2022 is a typical example, where the investor benefited from its large distribution network to help create value.

• Financial/specialist investors: Often led by private equity firms or private investors, the main purpose of the investment is to benefit from the underlying fundamentals of the asset class, its predictable income stream, and broader market valuation growth.

Fund managers such as Blue Owl, Petershill, Blackstone and Investcorp have all raised capital specifically for this type of investment, often labelled as strategic capital.

The two most common drivers of GP stakes investment are the consolidation we've witnessed across the ecosystem over the last couple of years, which has increased exit liquidity and created an exit market where buyers are often willing to pay a premium, and the EBITDA arbitrage between smaller and larger fund managers.

According to an InCap Group study,² firms with less than $200 million AUM typically see EBITDA multiples of around 6–8x, compared with 10–14x for firms with around $1 billion AUM, creating a significant embedded valuation dislocation.

Predictable revenue

Despite the headlines about private equity making fortunes through carry and promote, the truth is that the industry is becoming more commoditised, and Fee-Related Earnings (FRE, the management fee revenue minus operating expenses) have become one of the biggest sources of income for a firm, prized for being predictable and contractual rather than dependent on fund performance.

The predictability of that income allows shareholders to forecast recurring cash flows over roughly seven years, which is the typical holding period for closed-end funds.

Distribution is the bottleneck

Switching gears to the GPs, as fundraising becomes increasingly competitive, "owning the distribution" is a term we're hearing at almost every conference. While larger GPs are buying wealth management practices outright, GP stakes offer a more feasible route for smaller GPs to access distribution faster and more easily.

We're entering an ecosystem where GPs that don't have strategic investors on their cap table will increasingly struggle to secure further distribution.

The underlying fundamentals that GP stakes offer, from both a GP and investor perspective, are here to stay. According to Preqin,³ the total enterprise value of private markets GPs is expected to grow from around $1.7 trillion in 2024 to $3.4 trillion by 2030, effectively doubling the investable universe.

As family offices increasingly look for more direct investment opportunities, GP stakes offer a hybrid route: gaining exposure to established private market platforms while benefiting from the GP's existing infrastructure, distribution network and expertise, without having to build those capabilities themselves.