GP stakes: what are they, and why do they matter?

June 21, 2024
updated on

General partner stakes (GP stakes) represent a growing trend in alternative investing. GP stakes refers to  investors, typically larger institutional types, investing in the shares of high-performing private capital funds, like private equity firms, hedge funds, and venture capital funds, sometimes in addition to investing capital in the funds run by the firms themselves. The GP stakes position thereby exposes the LP to capital outcomes from the overall firm’s success, in addition the outcome of any one given fund run by the firm. GP stakes are an interesting new trend in the world of alternative assets, and can offer LPs attractive potential outcomes. But, it’s important to note that this is a highly speculative, new, largely unproven strategy being taken on by large investors with the capital and resources to withstand a total loss of their investment. Like many such trends in the history of the financial services and wealth management worlds, a trend like GP stakes may first be tried and proven by resilient institutions before being seen as suitable for individual investors. 

What are general partner (GP) stakes?

GP stakes involve investors acquiring ownership interest in the management companies of private capital management firms. This type of investment allows limited partners (LPs) or other investors to share in any potential profits generated by the management company (rather than just the returns from the funds managed by the firm). 

The market for GP stakes is relatively new, and is largely driven by institutional investors who are seeking diversified sources of returns and stable income beyond individual funds themselves. 

Why do GP stakes matter?

GP stakes are offering applicable investors a new way of approaching capital creation and risk mitigation strategies, and while these are almost entirely limited to institutions for the time being, they may trickle down to individuals in the years to come, much like the broader alternative assets industry has. However, individual investors should be cautious and thoroughly understand the associated risks before considering such investments.

Alignment of interests

By engaging in GP stakes, LPs can ensure that the firm they’re staking in has significant capital in play. This “skin in the game” means that the GP’s commitment to the outcome is further enhanced, with their interests even better aligned with the interests of their LPs. It is important to understand that having “skin in the game” does not guarantee the success of the investment, and there is still a risk of failure.

Stable income stream

GP stakes offer investors the potential for a stable income stream since they can earn from more than just fund distributions. They can also earn from management fees and carried interest, which tend to be less volatile than direct investments in private capital firms. Because they are less volatile, the fees and interest may offer investors a more predictable cash flow. While potentially more predictable, the income streams are not guaranteed and are subject to the firm's overall performance.

Access to top-tier firms

Taking on GP stakes can provide investors access to leading wealth management firms and the potential of their deal flow. GP stakes investors can then also potentially benefit from enhanced insights into those firms’ investment strategies and overall operations, that guid further capital allocation.

Growth potential

As  wealth management firms grow and diversify their investment strategies, the value of GP stakes can climb with them. Therefore, investors can benefit from the overall growth and success of the management company, instead of finding sole success from the growth of the individual funds that it manages.

The bottom line

GP stakes is a growing area of alternative investments and private markets investing. While it is largely sequestered away from individuals for the time being, that may be a good thing given how complex the strategy can be. Regardless, the approach presents an exciting new facet of the world of private market alternatives that may in the future present alignment of interests for GPs and LPs, in an investment that can generate potential stable income, access to top-tier capital firms, growth, and even enhanced risk-adjusted returns for investors.

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