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Investors have long appreciated the business model that is asset management, but historically, the only way they could gain exposure was through publicly traded asset managers.
The challenge is that those stocks tend to be very volatile, exhibit high correlations to the rest of a typical investor’s portfolio and usually do not provide much in the way of cash flow to their stockholders.
Yet the amount of assets invested in the private markets has grown by more than four times over the past 14 years, and most expect another doubling in the next six years. If that is true, one of the best ways to benefit from that growth would be to own the firms that get paid to manage those new assets.
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But is there really no choice but to invest in the public markets, where investors tend to be fixated on the 90-day earnings cycle, which can create as much as 50% more price gyration than the average stock?
In fact, there is another choice for investors seeking exposure to the growth of private markets, one that can capture the actual economics without the noise.
That path is GP stakes.
The growth capital thesis
At its core, a general partner (GP) stake is a minority equity investment in an alternative asset management firm. The investor becomes a partner in the management company itself, participating in management fee revenue, carried interest (revenue generated through sharing in positive performance delivered to investors) and returns on the GP’s own capital deployed into its funds.
Many of the top private asset managers have a desire to expand their businesses and will seek growth capital to help them accomplish that objective.
That said, not just any firm can attract the capital from sophisticated investors. The managers who can attract GP stakes capital are typically top-tier firms with proven track records, institutional client bases and significant runway ahead.
Those that are able to attract GP stakes capital are able to seed new strategies, expand into adjacent asset classes and invest in the infrastructure that can help them grow their business. The capital is patient, the alignment is genuine, and the partnership is long term.
This is why the space has historically attracted only the most sophisticated institutional investors. They recognized that owning the factory, not just the products it makes, offers a differentiated return profile anchored by long-term recurring revenue and amplified by performance.
Why invest in GP stakes now?
Several dynamics are converging to make…
Read More: General Partner Stakes: Why Investors Buy Into Private Equity
