Private markets represent a large and growing opportunity for individual investors, offering a variety of investment strategies that can enhance a portfolio’s risk and return profile. Recently, private wealth investors have experienced increased access to private markets as a larger variety of alternative products has been made available to them.
For well over a decade, the Blue Owl team has pioneered a strategy enabling investors to participate in the growth of private markets generally: GP Minority Stakes. In this strategy, a minority partner (i.e., an investor such as Blue Owl) provides capital to an alternative asset manager (the General Partner or “GP”) in exchange for a minority equity interest (~10% to ~30%) in the business and, in turn, receives a pro-rata share of the firm’s earnings, which include management fee income, balance sheet return and carried interest.
GP minority stakes (“GP Stakes”) investors seek to acquire minority equity interests in institutional private capital managers across the private capital universe, including buy out, venture capital, growth equity, distressed debt, infrastructure, private credit, energy, real estate and other strategies. A GP Stakes investor typically participates in the earnings of the business alongside the founders or management company owners, including the economics of all funds that a manager currently manages and all funds that they will raise in the future. By diversifying the portfolio across different private capital managers, a GP Stakes investor participates in the success of multiple GPs, ultimately building a portfolio benefiting economically from hundreds of underlying funds across vintages, thousands of portfolio companies, as well as many strategies and multiple geographies.
Despite the favorable investment attributes of the strategy, GP Stakes remains a largely untapped opportunity in private wealth. To shine a spotlight on this potential opportunity for the individual investor, I sat down with Michael Conley, Managing Director and member of the Blue Owl GP Strategic Capital investment team.
The history of GP stakes investing can be traced back to the early 2000s, when a few LPs and investment banks began making direct investments in GPs. Over the next few years, the strategy gained popularity as sovereign wealth funds leveraged their relationships with large GPs in the industry by investing in their management companies while also making significant LP commitments. The prevalence of GP Stakes really took off in 2015, largely as the result of the maturing of the private capital industry coupled with GPs’ needs for capital to support their growth. This meant that an industry that was originally self-funded required external capital to grow.
In 2010, the Blue Owl GP Strategic Capital platform (formerly Dyal Capital) was launched, dedicated to the GP Stakes investing strategy. For over a decade the Blue Owl GP Strategic Capital platform has been at the forefront of providing innovative minority equity and financing solutions to leading private capital managers. Today the strategy has become more familiar in the private equity industry, but Blue Owl maintains a leading position in the market. In fact, Blue Owl’s funds account for more than half of the total capital raised globally dedicated to the strategy.
That’s correct. GP Stakes investors typically have access to three cashflow streams, (i) management fee income, (ii) balance sheet return and (iii) carried interest proceeds. Management fees are contractually locked-in income paid to a GP by its fund investors. GP Stakes investors receive their pro-rata share of their GPs’ management fee income (typically net of expenses), generating relatively stable cashflow. In addition to management fee income from each of the GP’s funds, investors may earn a return from the firm’s balance sheet. This balance sheet return is predominantly the return on the GP’s co-investment in their funds, commonly referred to as the “GP commitment”, where a GP invests alongside its investors for alignment and to create their own “skin in the game.” Participating in the balance sheet return allows GP Stakes investors to benefit from the performance of the underlying funds managed by a GP.
The final stream of potential income is carried interest proceeds. Similar to the balance sheet return, carried interest proceeds give investors the opportunity to benefit from the success of the GP’s underlying funds should they achieve specific performance hurdles. Although carried interest proceeds and balance sheet returns are not guaranteed, buying into established businesses can help provide enhanced visibility on these future cash flows or at least a higher level of confidence that they will be generated.
Unlike a single LP investment, a GP Stakes investment typically receives distributions relating to all existing and future vintages of managed by underlying GPs that it owns. The exposure to the cash flow from contractual management fee earnings, balance sheet returns and carried interest proceeds from prior vintages of the underlying GPs provides investors with meaningful distributions quickly following an investment, mitigating any “J-curve” effect. Instead of waiting for value creation strategies and exits to take effect for underlying investments to produce returns for investors, LPs participate in the distributions from the underlying GP as soon as the GP investment is made.
Of course. As was maybe implied by what we discussed a moment ago, perhaps the most obvious and important benefit of this strategy is diversification. We believe that a portfolio of stakes in different private capital managers creates a portfolio that is diversified by investment strategy, asset class and geography. Owning at the GP level typically means investors participate in all existing GP’s portfolio company exits through the balance sheet return. With interest in multiple GPs, investors can benefit from exposure to a wide range of strategies without the costs or challenges typically associated with assembling such a portfolio.
In our view, in a portfolio where an investor is allocating heavily to traditional investments, GP Stakes can be a complimentary diversification strategy.
The one word answer is: capital. Since 2010, the asset class has grown from ~$3 trillion, to over $13 trillion of assets under management. Over that same period, the average GP commitment has grown from ~1% to ~5—in other words, a ~20x increase by dollar amount. A minority stake sale can solve their capital need and fuel future growth. A common misperception of a stake sale is that it is a “cash out”, when is fact it really is a “cash in.” These firms are doubling down on their business and reinvesting more money back into their funds alongside their LPs. We believe this creates better long-term alignment.
Selling a minority stake affords GPs flexibility to make larger investments alongside LPs. Ultimately, the GP’s need for strategic primary capital accelerates exponentially with firm and industry growth.
Selling a stake can also facilitate the execution of specific strategic goals, such as platform expansion through the organic launch of a new product or the acquisition of an existing team and strategy. It can also present the opportunity to better organize their capital structure, potentially buying out external or silent partners.
Another significant competitive advantage is our team. Our senior investment team has 20+ years of average industry experience and zero turnover since inception. We have by far the industry’s largest global value creation team for our underlying partner managers, our Business Services Platform, that today stands at over 50 people and aims to empower our partner managers with strategic support and resources. Since 2010, we have made over 85 investments and invested $32 billion across our partner managers, cementing Blue Owl GPSC as the clear market leader.
Figure 7
Post-deal strategic partnership and value creation support
