GP Strategic Capital

Pulse check: 2023 GP Strategic Capital Outlook

By Sean Ward
September 21, 2023
Less than 3 min read

Partnership, Resilience, and Innovation

In this time of economic uncertainty, private markets have remained comparatively resilient.

In the first half of 2023, many investors struggled with the “denominator effect” (i.e., a stable private market allocation becoming overweight in a total portfolio as the value of the overall portfolio decreases), curbing appetite for new capital commitments. However, optimism for the remainder of 2023 is evident as alternatives remain an important component of multi-asset portfolios and investors look to hedge against uncertainty. 

As a leading capital solutions provider to private market firms, we seek to create innovative structures that meet the individual needs of our underlying partner managers, while continuing to deliver strong and consistent returns to our investors. As discussed in more detail below, we believe that the current environment provides attractive opportunities to provide attractive, risk-mitigated returns through acquiring stakes in large, diversified, institutionalized managers.

GP Stakes is broadly defined as non-controlling minority investments in private capital managers. Below are a few key themes we believe are driving the private capital industry and specifically the GP Stakes market for 2023.

Ample catalysts exist for future GP Stakes deals 

Following several decades of consistent growth, the private capital industry is maturing, leading to further consolidation in the space. According to Preqin, from 2012 to 2022 the proportion of private equity firms over 20 years old increased from 29% to 47%.pulsecheck_gpsc_1-1

Emerging managers are disadvantaged in the current fundraising environment and often need to finance their operations without strong balance sheets. GP Stakes transactions have grown over the past two years. Many of these transactions involve seasoned managers, where the track record and longevity of the strategy being acquired are considered major intangible assets.

Investors remain committed to private markets despite fundraising headwinds and macroeconomic concerns 

According to recent Preqin findings, more than three-quarters (81%) of investors surveyed think we are currently on a decline or approaching the bottom of both the macroeconomic and real estate market cycles. Respondents believe that the equity market is further ahead – 26% think it is already starting to recover. Investors are also increasingly mindful of the growing valuation gap between public and private equity. Overall, both structural and market-related factors are creating a challenging fundraising environment.  

 The share sell-off in public equities and fixed income securities in 2022 left many investors grappling with the denominator effect and a reduced appetite for new capital commitments. Recent data indicates that investors remain willing to deploy fresh capital. More than half of all investors surveyed by Preqin are targeting fund commitments in the third quarter of this year, and an additional 8% are expecting to make commitments before year-end.

Established GPs are well-positioned as more capital is contributed to larger, more seasoned managers

Fundraising is becoming more challenging for new GPs as a greater share of total fundraising is now likely to take the form of re-ups to existing manager relationships.

The combination of weaker LP appetites and a more competitive fundraising market seems to favor established fund managers. Preqin data shows that average fund size for experienced fund managers this year has increased by 46.3% to $1.1 billion, while fund size for first-time fund managers shrank by 25.8% to $300 million.

pulsecheck_gpsc_2-1

Overall, the top ten funds in 2022 made up ~34.1% of capital raised in 2022, compared with 21.2% in 2021. Fewer new managers have joined the market than in any other year, allowing experienced fund managers to maintain the upper hand.

Private market performance remains strong

Private market performance has generally remained more resilient than public markets, continuing a trend that has been apparent over the past two decades. According to Pitch Book, in 2022 PE returns experienced only a mild correction, while the S&P 500 ended the year down 19.4%. We believe this outperformance is largely driven by the long-term focus of private equity firms, who are able to work closely with the management teams to support growth. As shown below, private equity-backed companies have exhibited superior operating performance to public companies over the last two decades.

pulsecheck_gpsc_3-1

In conclusion... 

We believe that underlying market dynamics will continue to favor large, institutionalized GPs in the current fundraising and deal environment. Catalysts for GP stakes deals are robust, as GPs look to diversify their offerings and fortify their balance sheets. We believe that we are well-positioned to capitalize on this opportunity as the largest investor in the space, having raised over 60% of capital raised by the 10 largest GP Stakes Funds4, to pursue this strategy globally and having closed over 85% of transactions larger than $600 million5.

 

Sean

Sean Ward

Senior Managing Director, Blue Owl Capital

 

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Past performance is not a guarantee of future results. The views and opinions expressed herein are those of Blue Owl and are subject to change as markets and other conditions fluctuate. Blue Owl is under no obligation to update or keep current the information presented.

Please see endnotes and important information at the end of this page.

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Endnotes

  1. Preqin as of 2022, GSAM. As of December 2022. Includes all private equity buyout firms with AUM greater than $1bln. Sources: Preqin Investor Outlook: Alternative Assets H1 & H2 2023, Preqin Global Private Equity Report 2023 Q1 2023 Pitchbook Global Private Market Fundraising Report, Q1 2023 Pitchbook US PE Breakdown, Goldman Sachs, “The Tide Goes Out: Assessing Private Market Manager Stability”
  2. Preqin Global Report 2023: Private Equity (Figure 1.12). Sources: Preqin Investor Outlook: Alternative Assets H1 & H2 2023, Preqin Global Private Equity Report 2023, Q1 2023 Pitchbook Global Private Market Fundraising Report, Q1 2023 Pitchbook US PE Breakdown
  3. Cambridge Associates LLC Private Investments Database, FactSet Research Systems, and Frank Russell Company. Data from January 1, 2000 – March 31, 2022
  4. Private Equity International, “Spot the Difference: How GP stakes firms differentiate their capital”, as of April 19th, 2023
  5. Represents transactions by GP Stakes vehicles since inception to 31-Jul-23. Sources: Preqin Investor Outlook: Alternative Assets H1 2023, Preqin Global Private Equity Report 2023, Q1 2023 Pitchbook Global Private Market Fundraising Report, Q1 2023 Pitchbook US PE Breakdown, Goldman Sachs, “Unpacking Private Equity Valuations and Returns”
Important information

Unless otherwise indicated, the Report Date referenced herein is June 30, 2023.

Past performance is not a guarantee of future results.

Assets Under Management (“AUM”) refers to the assets that we manage and are generally equal to the sum of (i) net asset value (“NAV”); (ii) drawn and undrawn debt; and (iii) uncalled capital commitments.

The material presented is proprietary information regarding Blue Owl Capital Inc. (“Blue Owl”), its affiliates and investment program, funds sponsored by Blue Owl, including the Blue Owl Credit, GP Strategic Capital Funds and the Real Estate Funds (collectively the “Blue Owl Funds”) as well as investment held by the Blue Owl Funds.

The views expressed and, except as otherwise indicated, the information provided are as of the report date and are subject to change, update, revision, verification, and amendment, materially or otherwise, without notice, as market or other conditions change. Since these conditions can change frequently, there can be no assurance that the trends described herein will continue or that any forecasts are accurate. In addition, certain of the statements contained in this webpage may be statements of future expectations and other forward-looking statements that are based on the current views and assumptions of Blue Owl and involve known and unknown risks and uncertainties (including those discussed below) that could cause actual results, performance, or events to differ materially from those expressed or implied in such statements. These statements may be forward-looking by reason of context or identified by words such as “may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, potential or continue” and other similar expressions. Neither Blue Owl, its affiliates, nor any of Blue Owl’s or its affiliates' respective advisers, members, directors, officers, partners, agents, representatives or employees or any other person (collectively the “Blue Owl Entities”) is under any obligation to update or keep current the information contained in this document.

This webpage contains information from third party sources which Blue Owl has not verifiged. No representation or warranty, express or implied, is given by or on behalf of the Blue Owl Entities as to the accuracy, fairness, correctness or completeness of the information or opinions contained in this webpage and no liability whatsoever (in negligence or otherwise) is accepted by the Blue Owl Entities for any loss howsoever arising, directly or indirectly, from any use of this webpage or its contents, or otherwise arising in connection therewith.

All investments are subject to risk, including the loss of the principal amount invested. These risks may include limited operating history, uncertain distributions, inconsistent valuation of the portfolio, changing interest rates, leveraging of assets, reliance on the investment advisor, potential conflicts of interest, payment of substantial fees to the investment advisor and the dealer manager, potential illiquidity, and liquidation at more or less than the original amount invested. Diversification will not guarantee profitability or protection against loss. Performance may be volatile, and the NAV may fluctuate.

This webpage is for informational purposes only and is not an offer or a solicitation to sell or subscribe for any fund and does not constitute investment, legal, regulatory, business, tax, financial, accounting, or other advice or a recommendation regarding any securities of Blue Owl, of any fund or vehicle managed by Blue Owl, or of any other issuer of securities. Only a definitive offering document (i.e.: Prospectus or Private Placement Memorandum) can make such an offer.

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