In private equity, the institutions and individuals who invest in private equity funds — called limited partners — are always there to balance out the, at times, unbridled enthusiasm of GPs for new ways of making money.
By nature, GPs will chase new and creative ways to make money. That’s good; good for the GPs, good for their LPs, hopefully good for companies backed by PE shops.
But inevitably, GPs will find ways to push the envelope of making money into realms where their balance of “alignment” with their fund investors gets out of whack. This basically means GPs are making money in ways that are not as beneficial to their LPs.
And that’s where LPs come in to start questioning and pushing back and sometimes going even further. We’re starting to see this again when it comes to GPs who raise traditional PE funds and also launch special purpose acquisition companies.
SPACs are the shiny new investment strategy that more and more GPs are jumping on. A SPAC is an investment pool that raises money from public investors. It generally has two years to find one deal usually in a specific industry and geography. It’s a way to give regular investors access to private equity talent that they are normally barred from. Also, it gives the sponsor flexibility to hold the investment beyond the confines of a traditional PE fund — a theme we’ve been exploring all year.
SPACs have not historically been raised by GPs who are also raising traditional PE funds (with some exceptions over the years). Until this year; now we’re seeing more active GPs with live funds also raising SPACs. This has led to questions by LPs about potential conflicts between the funds and SPAC pools. How are deals allocated between the SPAC and the funds? How much time are investment professionals spending on the SPAC versus the funds? Has the GP communicated enough with LPs on how everything will work together?
These are legitimate concerns of potential conflict being raised, quietly (as always), by some LPs. But it feels like early days and it’s not even clear if the SPAC trend is here to stay. Perhaps it fades out in a different kind of market. Maybe best practices won’t even have enough time to be entrenched.
But, if SPACs represent a fundamental addition to active GPs’ playbook, these best practices will have to become codified. It’s worth figuring out now the best ways GPs can approach this strategy.
For more, check out our story here on how one GP, True Wind Capital, dealt with its SPAC. And read our deep dive on the SPAC trend here on PE Hub. And as always, let me know your thoughts on this issue at email@example.com.
Onex agreed to buy OneDigital, an advisory business focused on health, retirement/wealth and HR services for employers, for $960 million. Onex is acquiring a majority stake in the company from New Mountain Capital. Read it here on PE Hub.
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