A rising number of private equity managers have sold minority equity stakes to other PE firms to raise capital to support acquisitions, expand into new areas and fund technology investments.
This trend has accelerated because of the emergence of players dedicated to buying portfolios of minority stakes including Dyal Capital, Blackstone’s Strategic Capital Holdings, Goldman Sachs’ Petershill unit and AlpInvest Partners. This group together has raised more than $17bn to pursue deals since 2012 and is seeking to raise $14bn more, according to Bain, the consultancy.Another motivation for sellers is to allow founding partners approaching retirement age to leave.
“The need to manage generational change often is not the publicly stated reason since firms are careful to avoid the appearance that they are cashing out the team responsible for historical performance,” said Hugh MacArthur, head of Bain’s PE practice.
“The truth is that a growing number of firms face the challenge of succession planning as founding partners approach retirement.”
Dyal, a division of Neuberger Berman, has been particularly active, acquiring stakes in 40 private equity and hedge fund managers including American Securities, Golub Capital, Clearlake, Sound Point and Starwood.
The acquirers gain access to the income stream from management and performance fees but are also betting that their partners will be able to raise substantial assets.
Terms of these transactions are rarely disclosed but some observers believe acquirers are overpaying, given the deteriorating outlook for returns, as a result of the intense competition among PE managers for deals. Selling an equity minority stake also dilutes the profit pot for existing partners, increasing the risk that top talent could leave.
Buyers, said Mr MacArthur, were putting “enormous faith” in private equity managers' ability to maintain performance, underlining the need for thorough due diligence and care in structuring any deal.
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