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Private Equity GPs Warm to Stake Sales

Deciding to sell is often a tough choice for middle-market PE firms, but an evolving market can make striking a deal an attractive move

Private Equity GPs Warm to Stake Sales

Private equity firms are well versed in the ins and outs of acquiring companies. But a growing number of PE firms are learning what it is like to be on the other side of the equation as acquirees themselves.

As limited partners increasingly lose patience with an idle mergers and acquisitions (M&A) market that has locked investments up far longer than expected and stalled returns, instances of PE firms as acquisition targets—whether partially or outright—have been on the rise. From underperforming PE funds, to fundraising challenges and even succession issues, a variety of factors have made it attractive for many middle-market PE firms to entertain partial divestitures or outright sales.

“What we’re really seeing is industry consolidation, as private equity as an industry and as an asset class matures,” says Pete Witte, EY’s global private equity lead analyst. “There’s a lot of private equity shops out there and a lot of private equity shops that are focused, in particular, on just one or two asset classes. So, a lot of the plays we see right now are around bringing in new capabilities or new teams; building out credit and building up infrastructure.”

With such deals offering multiple benefits for acquirers, ranging from the addition of new capabilities to discounted portfolio expansion, industry experts expect this trend to continue as M&A activity remains suppressed for the near term.

A Tough Sell

Deciding on a sale is often a difficult choice for private equity firms, but in today’s challenging M&A environment, experts say it can become a necessity.

A major driver of the trend is an enormous amount of dry powder that PE firms are sitting on and the supply imbalance that has resulted from a dearth of M&A activity. Following massive growth in the number of PE firms over the past couple of decades, a too-many-cooks-in-the-kitchen-type of scenario has emerged, and there are simply not enough ingredients to go around. With a large number of PE firms chasing only a handful of deals, coupled with high interest rates and capital costs that are not conducive to traditional leverage buyout deals, fund managers have struggled both in their efforts to find exit opportunities for existing portfolio holdings and to find places to put dry powder to work.

“If you look at the trajectory of when a PE firm is going to start to contemplate a GP sale or a fund sale, a continuation fund may be a precursor,” says Marc Chase, a principal at Baker Tilly, which was recently acquired by investment firms Hellman & Friedman and Valeas. “A belief that bringing new investors into a current investment instead of going after new investments can be an indicator. Other indicators would be failing to launch a new fund in the anticipated timeframe when the prior fund was near or fully deployed, unsuccessful dispositions on currently held assets—either unable to exit the position, or unable to exit at the anticipated multiple, key investment team departures or consistent underperformance in their fund class against their peer group.

“The practice of purchasing GPs or funds is the logical extension of LP secondaries transactions and definitely seems to be growing,” adds Chase, who just had a client reach out regarding plans to start a GP acquisition fund to buy out GPs or orphaned assets stuck in old funds that GPs are no longer actively interested in managing.

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Experts say 2024 is expected to be a critical year and a major determinant of which firms survive. If M&A deal flow picks up, firms that have been struggling to generate returns may decide to try and make a go of it. But in the event of a hard landing, firms will face more pressure to sell.

“A number of funds have missed their targets and first-time funds have had their struggles given their relative lack of scale,” says Sash Rentala, a partner and head of financial sponsors at Solomon Partners, adding he believes firms that raised their first funds between 2019 and 2021 that are trying to go after their second or third funds are most ripe for consolidation at the moment. “Most GPs would probably love to run their own business and maintain their independence… But if you’re not able to hit your returns, having a big brother to help you compete is probably a good thing for a lot of these funds,” says Rentala.

Most GPs would probably love to maintain their independence… But if you’re not able to hit your returns, having a big brother to help you compete is probably a good thing for a lot of these funds.

Sash Rentala

Solomon Partners Securities

An Evolving Deal Market

The practice of acquiring PE firms and underperforming funds is not new and has been around since the early 2000s. Until now, however, it has primarily been insurance companies with deep capital pools acquiring credit strategies. But a new group of acquirers has emerged.

“There’s been a migration from insurance companies and traditional asset management firms being the principal acquirers to private market firms—largely listed, or soon-to-be listed firms, looking to build out capabilities,” says Bradford Pilcher, a partner at Bonaccord Capital Partners, itself an active acquirer of non-control equity interests in mid-market private sponsors.

As the number of listed PE firms grows, he anticipates that acquisitions of middle-market PE firms as an avenue for growth will increase accordingly, particularly control acquisition of PE businesses. “What we’ve seen over the last year or two has been a real focus on acquiring secondary firms, and in the past year acquisitions of infrastructure businesses,” says Pilcher, pointing to secondary deals including real estate investment manager Bridge Investment Group’s acquisition of middle-market secondaries firm Newbury Partners, Franklin Templeton’s acquisition of Lexington Partners, Ares Management Corp.’s acquisition of Landmark Partners, PGIM’s acquisition of Montana Capital and Oaktree’s majority interest stake in 17Capital.

He also highlights infrastructure deals such as CVC Capital’s acquisition of a majority stake in DIF Capital Partners and Bridgepoint’s acquisition of Energy Capital Partners, among others.

Finding a Win-Win Scenario

For GPs, making acquisitions or sizeable investments in middle-market PE firms can be a good way to expand their own portfolios into new geographic, sector and strategy capabilities; to add experienced personnel into their fold; to expand their LP base and to pick up attractive portfolio companies at rock-bottom pricing.

And as the number of PE firms being acquired or selling off stakes has inched up, the value of these deals has increased substantially. According to data from Bonaccord as of November 2023, in 2017 the AUM for such deals totaled $52.3 billion, with activity nearly quadrupling to more than $195.8 billion by 2019. Over the past three years, the total AUM of private markets firms acquired in control acquisitions has soared, totaling $341.6 billion, $345 billion and $304.2 billion in 2021, 2022, and 2023 respectively.

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Those can be attractive figures for PE sellers. While experts say sales are usually struck as a last resort, many PE firms are warming to the idea of selling off stagnant or underperforming funds, or selling stakes in their firms outright. Selling off portfolios gives middle-market PE firms an alternate avenue to monetize such investments and the opportunity to return some capital to LPs, a particularly attractive prospect for firms looking to raise money for new fund launches. And like any other operator considering a sale, selling can be an attractive option in cases where senior managing partners are nearing retirement age and have not put adequate succession planning in place

Sources say dealmaker interest in acquiring PE firms won’t only continue, but is likely to expand across borders.

While many of the GP stake deals that have taken place so far have been in the U.S., interest in such deals is picking up overseas as well. “It has been coming from the U.S. so far, but now in Europe we’re seeing examples with French and U.K. manager rights that are raising these types of arrangements. And I think we will see more developments in Europe,” says Vincent Remy, a partner in EY’s Luxembourg office who leads the firm’s private debt group. “The early 2024 fundraising environment is not great… Everything points in the direction that investors taking stakes in GPs is going to carry on in the current environment,” he says.



Britt Erica Tunick is an award-winning journalist with extensive experience writing about the financial industry and alternative investing.



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