- Founder cash-outs and investments to expand firms are different
- Minority-stake sales can help with succession
- Concern about third-party investors chasing weaker-performing firms
Several consultants to limited partners said they haven’t seen evidence of talented junior executives seeking to leave firms that have completed sales of minority stakes in their management companies.
The consultants, on a panel at the Emerging Manager Connect East conference July 26 at the Harvard Club in Manhattan, were responding to a question about possible turmoil caused by such sales. Buyouts reported recently that some junior executives were frustrated after such sales because these deals usually include the third-party investors taking a slice of carried interest in future funds, diluting future earnings for partners.
“Minority investments can be beneficial to junior executives if it shows them a path to how senior people move on,” said Jose Fernandez, partner at StepStone Group, who was speaking on a panel with other consultants and LPs. Such third-party capital can help firms with generational leadership transitions, he said.
Minority investments used for firm growth and investments that simply cash out founders are different, said Sheryl Schwartz, managing director at Caspian Private Equity, also speaking on the panel. Such payouts for founders, without consideration of younger executives, have the potential to cause turmoil, she said.
Fernandez said many of the recent GP minority-stake sales have been done with strong-performing firms, which makes them relatively easy to justify. The concern will be if investors start to look at lower-quality firms, which may be inevitable considering the flood of money rushing into the space for funds focused strictly on minority-stake sales.
Firms like Dyal Capital Partners, Goldman Sachs’s Petershill Group, GP Interests, Hycroft Capital, AlpInvest Partners and Blackstone Group have been chasing minority-stake deals with private equity GPs.
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Participants at Partner Connect East during a break, July 26, 2017, at the Harvard Club in Manhattan. Photo by Robert Daniel, Buyouts.