GP minority stake sales are shaking up the industry


private equity, IFC, Africa, emerging markets

We’ve been getting inundated with tips about GP minority-stake sales. Seems we’ve hit some kind of threshold beyond which some folks are fed up with the ways these deals have worked out.

We’re hearing that junior executives who were not part of the deals are exploring options to leave their firms. If you hear of such occurrences, let me know at [email protected], use our anonymous tip box on PE HUB, Twitter @chriswitkowsky or call or text my cell, 646-875-9286.

Junior execs might be leaving not specifically because of GP minority-stake sales but rather because such deals are the final straw for some people who were already considering leaving. And with the enormous demand in the fundraising environment, there may not be a better time than now to try and raise a debut fund.

There’s concern that these stake sales, benefiting only the founders of the firms, dilute carried interest for junior execs in future funds. After such deals, third-party investors collect some percentage of carry on future funds.

This is also causing limited partners consternation and the expectation is this frustration could emerge in subsequent fundraisings. The idea is that investors have to share some minority percentage of management fees and carry with third parties – rather than handing over 100 percent of such obligations to the GPs they are backing. This is especially poignant in an era where LPs are pressuring GPs to cut fees.

There are ways to make these deals more equitable through the organization, sources have told me. There seems to be two versions of this – some deals have all proceeds going to a small handful of people, who pocket the bulk of the cash; other such deals find ways to include a wider array of executives. Also, some deals are not cash-outs for founders; instead, proceeds are injected into the management company for things like strategy expansion.

In private equity, this seems to be the biggest story of the year. And it’s not going away anytime soon, with the amount of money being raised specifically for this strategy. How does it all shake out?

We’ve spent a good amount of time covering this issue for you, Dear Reader. Check our high-level feature on this trend here.

Private Equity Editor Chris Witkowsky reflects at home. Photo by Wendy Witkowsky

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