After co-founding and then spending 15 years running the GP stakes business at Wafra, a $31 billion investment firm, Michael Shedosky left the company last summer to start a similar business at Morgan Stanley.
Like the short, but growing, list of GP stakes investors, Shedosky plans to make minority investments in companies that need capital for a variety of reasons. The strategies typically target mid-size alternative asset managers with more than $3 billion and that are at least 10 years old.
It might seem like a less-than-ideal time to launch an asset management business that invests in other asset managers. Down markets and rising interest rates have dragged venture capital fundraising to multiyear lows and private equity fundraising is looking bleak (the capital-raising environment is one of the biggest worries executives have this year, according to their personal coaches).
But Shedosky and others say now is as good a time as any to be in the business of GP stakes investments. The growth of private markets is a secular trend expected to continue for years to come. Even during the current tough market environment, asset managers still need or want capital — and deals are happening.
GP stakes strategies also continue to raise capital — evidence of the confidence in the young asset class.
The platform Shedosky is building at Morgan Stanley will focus more on up-and-coming alternative asset managers, similar to the firms often targeted by Investcorp and others.
“The growth-stage segment of the market is just less competitive. There’s just fewer competitors. I would say there’s less than $2 billion going after thousands of GPs in that segment of the market,” Shedosky said. “But in the mature space, and I’m being a little bit rough with these numbers, there’s something like $25 billion of dry powder going after 70 GPs larger than $10 billion that haven’t sold a stake yet.”
Since 2017, there have been an average of 27 GP stakes deals each year, according to PitchBook. There were only 17 deals in 2022, and PitchBook hadn’t tracked any deals in 2023 as of January. But there have been GP stakes deals since the start of the year (Blackstone announced an investment in FTV earlier this month). The lag in data is partly because PitchBook isn’t following the space as closely. The employee who covered GP stakes has since left the research and data company to join Bonaccord Capital Partners, an investment firm focused on middle-market GP stakes, according to Tim Clarke, lead analyst for private equity at PitchBook.
Clarke said his understanding is that there will be about as many GP stakes deals in 2023 as there have been in recent years. Bonaccord and Hunter Point Capital are among the firms that have made investments this year, he said. In June, PitchBook plans to publish a broad list of minority investments that will include GP stakes.
“When they want to, they’ll disclose it, like Blackstone just did with FTV. But a lot of these are non-disclosed. It’s like a tree falling in the woods. There’s some that are disclosed, but the sizes aren’t known,” Clarke said.
Shedosky said he is aware of roughly a dozen GP stakes deals that have happened this year and he expects there will be somewhere between 20 and 40, based on his interactions with dealmakers.
There is a “whole generation” of alternative asset management firms maturing and institutionalizing, said Mustafa Siddiqui, senior managing director and head of Blackstone’s GP Stakes business. He added that a GP stakes investor could be a good partner for those firms because they can offer more than just capital — they can provide support and advice for scaling the business.
“That’s the broader backdrop of what’s happening in the industry as a whole, even before this downturn occurred, that’s been happening over the last several years now,” Siddiqui said. “In this environment, as portfolio company exits get delayed, so too do the cash flows coming from the carry. And so that does create more of a need for outside capital to fund the GP commitments and also to fund growth initiatives that the firms might want to undertake.”
In a tougher economic environment, especially when inflation has been a big part of the story, helping asset managers save money on costs and improve bottom lines is especially attractive, Siddiqui said. Blackstone has been anticipating a new market regime for the better part of three years, but the GP stakes team isn’t worried about it now that it’s arrived. The best managers remain healthy, well positioned, and maintain the ability to raise capital from their own investors, even as capital becomes more scarce, according to Siddiqui.
Blackstone is being “very selective,” but Siddiqui said he still expects there will be 20 or more GP stakes deals in 2023 and that the number will increase in the coming years.
GP stakes activity has increased over the past 15 years and is becoming better known and understood by asset managers, according to Ali Raissi-Dehkordy, a partner and the global co-head of Goldman Sachs Asset Management’s Petershill Group, which focuses on GP stakes. More and more companies that have sold stakes are reaping the benefits of having a strategic partner and sharing that experience with others, he said.
While GP stakes deal activity has slowed recently — and due diligence on the deals is especially stringent right now — Raissi-Dehkordy said there will still be many deals in 2023 and beyond.
“It’s a very cool strategy. It’s got kind of a lot of sex appeal to it. Returns have been good. But, you know, returns can go in both directions. Investing in private equity alternative managers was like perfect five years ago, when rates were going down,” Clarke said.
Further in the future, Clarke says there will likely be consolidation of the GP stakes businesses like there has been in other areas of asset management.
“There will be minority transactions, there will be control transactions, the bigger are gonna get bigger,” Clarke said.
