Firms & Funds

LPs scrutinize GP-stake sales in due diligence for new funds

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Illinois Municipal Retirement Sund, Illinois MRF, private equity, pension fund
Oracle Team USA on Oct. 6, 2016, sails in front of the Chicago skyline during a practice session for the America's Cup World Series sailing event. Reuters/Jim Young
  • LPs want to know whether founders are cashing out;
  • How stake-sale proceeds distributed in organizations, and,
  • Whether a firm is developing new strategies

Limited partners are scrutinizing private equity minority-stake sales as part of due diligence into funds to which they are considering committing, according to a panel of LPs and consultants at an industry conference in late June.

Such sales have been on the rise in the past few years as several firms have raised funds specifically to take minority stakes in management companies. LPs are thus inquiring about how these transactions affect an organization, said panelists at PartnerConnect Midwest in Chicago in late June.

Primarily, LPs want to know whether minority-stake sales represent a cashing out of founders and senior executives. The concern is that the high-level investor talent LPs want to back will lose focus after cashing out. Several sources who work on these stake sales said they are almost never designed solely to cash out founders, though LPs and other sources remain concerned about stake sales because of this.

LPs are also interested in understanding whether and how proceeds from such sales get distributed through the organization. For example, LPs want to know whether the next generation of leadership at a firm derives any benefits from such sales, panelists said.

Firms use such sales to provide liquidity for founders, expand into new strategies and enhance the GP commitments to future funds, among other things, sources have told Buyouts.

Potential investors in a new fund also want to understand whether a stake sale is going to lead to an expansion of a firm’s business.  If so, Buyouts sources have asked, how is the firm approaching such growth: by hiring from the outside or promoting from within?

Several firms have sold stakes in their organizations, including Vista Equity Partners, Providence Equity, Riverstone Holdings, Accel-KKR, Riverstone Co, Littlejohn & Co, H.I.G. Capital and Silver Lake.

Firms that focus on these deals include Neuberger Berman-backed Dyal Capital Partners, Goldman Sachs’s Petershill Group, Hycroft Capital and GP Interests, launched by former Morgan Stanley banker Mark Bradley.

Action Item: More on PartnerConnect events: http://bit.ly/2uL2rKB

Sailing – Americas Cup World Series – Chicago, Oct. 6, 2016: Oracle Team USA sails in front of the Chicago skyline during a practice session for the America’s Cup World Series sailing event. Photo courtesy Reuters/Jim Young