Financing management company / GP commitments

24th September 2019

17Capital finances management company expansion – we discuss the current challenges for managers around this topic.

The private equity industry has long been associated with dynamism, innovation and outperformance – key characteristics that help explain the continued strong flow of capital to this asset class.

Whilst this growth is welcome, two closely related challenges can come into play: the ability of managers to fund increasing personal GP commitments and to attract, retain and incentivise top talent to deliver those ambitions.

One notable industry response has been a large increase in the sale of stakes in the management company. Also referred to as GP stake investments, these are direct equity investments representing a minority, passive and dilutive ownership position in a sponsor’s management company.

The increased scale of investment has been significant, with several high-profile deals executed with large, long established and highly regarded managers. However, our analysis indicates that many managers may face issues in tapping into this financing source.

Whilst not exhaustive, we highlight three challenges in particular:

Size matters

Managers that have successfully sold stakes have raised, on average, more than $23 billion in AUM since launch, with an average 1st fund vintage of 2001 (Pitchbook 3Q 2018 Analyst Note). Clearly meeting such criteria takes time.

Performance matters

Pitchbook highlights most managers that sell minority positions in themselves deliver above-median returns. Additionally, they tend to demonstrate considerable upsizing in fund launches and/or diversification across strategies.

Timing matters

Selling minority equity in your management company is dilutive in nature. If a manager has strong conviction in its own growth strategy and the right foundations to deliver future growth, this may not be the right time to execute such a dilutive transaction.

Fulfilling Potential

17Capital: A different approach

Managers selling minority equity positions in their management company represents one of the key industry developments of 2019 however, size, performance and timing are, to some degree, limiting factors for managers looking at potential capital sources to fund future growth.

There is little doubt that continuing industry growth will bring such funding considerations to the fore for many mangers.

At 17Capital, our focus is on providing non-dilutive capital, whereby managers can retain full ownership of their business and remain the sole beneficiaries of future growth.

As with sales of minority equity positions in the management company, the proceeds may be used to fund future personal commitments as the business develops, and/or to realign incentivisation as part of a long-term people plan.

Repayment of the financing will come from a combination of distributions due to the manager from the realisation of assets (both from existing GP co-investments and from carried interest) and from management fees.

Pioneering Success

For 11 years, 17Capital has been providing financing to their clients, all of them private equity investors with outstanding track records. Whether to fund new investments, or to send dividends to shareholders, 17Capital always focuses on helping investors optimise their capital structure and achieve their ambitions.

With $2 billion invested in Europe and North America, and a team of 38 professionals between London and New York, 17Capital has unparalleled experience of financing private equity portfolios. 17Capital pioneered the use of preferred equity with portfolios of private equity investments, whether for direct investors, funds, or other firms that invest in private companies, and continue to lead the way in this new segment of the alternative asset management industry.

Preferred equity is flexible, unconstrained and non-dilutive capital with typically no maturity, security or covenants. 17Capital is the global “go-to” source of preferred equity financing for investors in private assets.

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