There’s a reason more firms are looking to buy stakes in buyout shops. It’s good business, said Anthony Maniscalco, managing partner and head of GP investments with Investcorp’s absolute return investment group.
Last week, HGGC became the latest private equity firm to sell a chunk of itself. Dyal Capital Partners, part of Neuberger Berman, acquired a passive, non-voting minority stake in the Palo Alto, California technology-focused firm.
Other PE firms that have sold stakes to outside investors include Leonard Green & Partners, Vista Equity Partners, Silver Lake, Golub Capital, Francisco Partners and Accel-KKR.
Maniscalco, who spoke at PartnerConnect Boston in late March, said such deals are attractive because they typically provide “high cash-on-cash yields” combined with critical protections for buyers. In fact, the loss ratio on GP minority stakes “should be very close to zero,” Maniscalco said during the conference.
Buyers that invest in GPs are buying “everything [the firm] raised to date,” Maniscalco said. This includes all the management fees they have on existing funds, the carry the firms have earned but have yet to realize, as well as buying into the GP’s balance sheet, said Maniscalco. “The downside is typically 1.5x your money,” he said.
“There is a built-in yield component to it,” Maniscalco added. “You are the owner of the bottom line but these firms do generate cash flow. So the set-up yields are very attractive relative to what you’d find with other private equity strategies.”
The private equity industry has progressed to where there are protections in place for investors, he said. Buyers can identify what can go wrong in a deal, and can structure and protect around that, he said. GPs can’t suddenly start paying themselves a $2 billion bonus, Maniscalco said.
For the seller, a stake sale is a way to capitalize the balance sheet. Such transactions allow firms to expand into new strategies, provide capital for generational transition or to meet GP commitments, he said. “Lots of these firms are in different points in the cycle,” Maniscalco said. “Although they’re led by wealthy people, those people have lots of capital locked up in their businesses.”
Maniscalco’s comments come as Investcorp plans to invest in private equity firms. The strategy is new for the New York firm, which formed a group last year to take stakes in GPs. Investcorp hired Maniscalco, most recently co-head of Credit Suisse’s Anteil Capital Partners group, to lead the strategic capital partners business within the ARI group in September. Maniscalco also spent three years as part of the leadership team at Blackstone Group that built its minority stakes business.
Investcorp, which has yet to invest in a GP, has a different strategy than industry leaders Dyal, Goldman Sachs’s Petershill, or Blackstone Strategic Capital Holdings.
Investcorp is targeting mid-sized private equity firms, or GPs that manage between $1 billion to $5 billion, Maniscalco said. It’s only interested in firms that are on at least their third fund, he said. He pointed to data that shows that those firms with a minimum amount of assets in Fund III, the likelihood of their not raising a fourth fund is “de minimis” or less than 5 percent, he said.
By comparison, firms that are only on their second fund are unlikely to have had realizations yet from their first fund, he said. “As a buyer it’s hard for us to hedge that they’re good investors yet because we don’t have the data to support it,” he said.
Investcorp also likes lower-middle-market firms that are investing in defensive sectors, as well as GPs of credit managers. “We look at a lot of managers of distressed because we think they’ve seen less in terms of flows into their businesses,” he said. “They’re less toppy asset-wise but also better setup for when the market does correct, which it will.”
Because it’s focusing on middle market firms, IPOs won’t be Investcorp’s only path to exit, Maniscalco said. “We could sell to other strategic buyers, we could potentially sell our investment to the likes of the three established players in the market today,” he said. “We believe other buyers of these types of assets could likely be insurance companies or multi-boutique asset managers.”
Action Item: For more information, contact Maniscalco at (212) 599-4700