PE HUB Wire Highlights, 5.31.19


private equity, mergers, M&A
Private Equity Editor Chris Witkowsky reflects at home. Photo by Wendy Witkowsky

GP stakes and key-exec arrangements: a tough conversation, Finishing off a big GP-led deal

Happy Friday!

I hope your week went well. I recently heard a few interesting things I wanted to share with you, Hubskis.

GP stakes: We’ve done a fair bit of reporting on GP stakes deals. Generally these types of deals occur when a third-party investor buys a minority stake in the management company of a private equity firm. The stakes are usually minority, passive, non-voting interests that provide the outside investor some sort of revenue sharing.

I learned recently that sometimes GP stakes agreements come with their own key-man arrangements that could differ from the key-man identifications in the firms’ funds. A GP stakes key-man trigger could lead to early buyback of an investor’s interest in the management company, among other things.

I imagine this is a brutally honest kind of conversation, when an outside investor comes in and lets a firm know that the guy whose name is on the door isn’t actually all that important. This is the sort of anecdote I hear sometimes from LPs — that the well-known executive who built the business is no longer actually in the trenches finding and executing the great deals. The real value drivers are actually the mid-level, next generation of leadership.

LPs, unfortunately, don’t necessarily have the pull to demand fund-level key-man arrangements that better identify who is actually creating value at a firm. They may want to commit to the fund and don’t have much flexibility to demand such a stark key-man change. A third-party investor, on the other hand, does have that sort of leverage, especially if their investment means a liquidity event for the guy whose name is on the door.

I’m going to look into this issue further. Have you seen situations where a GP stakes key-man arrangement differs from the fund key-man identification? Hit me up at cwitkowsky@buyoutsinsider.com.

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