Coller Capital’s Summer 2018 Global Private Equity Barometer reports that one in six private equity LPs have invested in GP management companies. Presumably, this statistic is based upon the Barometer’s survey of 112 private equity investors from around the world.
We at Meteor5 believe it’s a stretch to extrapolate the experience of 112 investors across a market that, according to Preqin, has over 6,800 institutional investors. It’s an unscientific sample of less than 2% of the market. Nonetheless, even haircutting the Barometer’s numbers, the growth rate of investing in GP management companies has been exceptional. It may not be akin to investing in Bitcoin during its early days, but it has a “flavor of the month” feel.
As discussed previously (see: http://meteor5cap.com/gp-stakes-investing-beware-of-valuations/), we believe GP equity stakes offer a very uncertain and highly speculative investment proposition. First, the entry valuations of the GP equity stakes being purchased are based on very long-term cash flows, often projecting multiple successor underlying funds and employing an ever-increasing number of strategies. Given the strong public equity markets and correlated fundraising records, any future equity market correction and the corresponding decrease in future fund formation could dramatically reduce these GP stakes valuations.
Second, as with any other investment, the value at the time of realization is critical. What is the most likely exit route for these GP stakes investments? There are few viable options. Perhaps a secondary sale or an IPO? Anyone who’s been involved in underwriting IPOs knows that the IPO market can open and close quite rapidly – and often due to unforeseen circumstances. When the public market corrects, and it will, GP stakes investors could wait a very long time to see their capital returned.
We continue to caution investors with regard to investing in funds and other vehicles to purchase GP stakes. Don’t get caught in the stampede.