In our 25+ years of investing in private markets, Barings has held hundreds of LPAC seats. Here, we offer insights on the issues and trends currently under debate between LPs and their GPs.
Through recent and wide-ranging conversations with fellow LPs and LPAC members, we have found the following four trends to be among the most pronounced in the current environment. While this is not an exhaustive list, we believe LPs should take these particular factors into consideration as they manage their portfolios and allocate capital throughout the remainder of the year.
1. The Big are Going Wider
As the industry matures, private equity GPs are showing an increasing willingness to be acquisitive, with many thinking more in terms of AUM and business growth than they may have in the past. We have recently witnessed a number of deals in which large GPs have acquired other GPs or platforms—such as smaller emerging managers, independent sponsor teams, or specialized managers with proven track records in select verticals (i.e. tech) and/or with adjacent or complementary strategies. From a strategic standpoint, these acquisitions can be advantageous in that they provide a way for GPs to buy into a trend or establish a new vertical in a relatively efficient and cost effective way. For a GP interested in secondaries, for instance, acquiring a secondary platform or proven team would likely be more efficient than building that capability in-house over a number of years. And because these GPs often have large existing distribution networks and a strong name in the market, they are typically able to leverage their wide-reaching LP base to enable supercharged growth for newly acquired strategies. These acquisitions can also benefit LPs, offering them greater exposure to new areas via a manager that they already know and trust.
For LPs, one key question around these acquisitions is whether the key investors that made a GP successful have become more focused on business building than investing. While many of the GPs involved in these deals are large, established businesses—and may already have investment teams that are well-positioned to continue driving value at the portfolio level—there is always a question of alignment. For instance, if a GP is selling GP stakes to third parties, without giving the internal partners a chance to purchase portions and become more ingrained, it could raise longer-term misalignment questions. Another consideration is around how the new team will perform under a new ownership structure, and with less autonomy. Ultimately, for the LP, it all comes down to underwriting and conducting diligence on the new team—digging into their track record and how they have executed as a team, and how they will replicate that success under a new ownership structure.