Europe’s growing appetite for GP stakes steers global deal volume to record high

(Correction: This story has been updated to correct the first close size of Armen’s fund, to include the fund’s target size, and to reflect that not all of its investments were from Fund 1.)

April 17, 2024 (Preqin News) – As GP stakes deals grew in popularity over the last decade, it was US firms that dominated the annual transactions list. That trend may be fading, however, with the latest data showing investment in European firms helped push deal activity to a record high in 2023.

A record 38 GP stakes deals were completed in 2023, according to the latest figures from Preqin, up from the previous high of 36 set a year earlier. Europe accounted for 16 transactions, more than double the previous highest annual total of six recorded in 2020. Meanwhile, the US also recorded 16 sales, the lowest number since 2018.

While the market for investment in private capital fund managers is established in the US, more investors are recognizing the potential opportunities that lie on the other side of the Atlantic. They include Paris-based GP stakes specialist Armen, which raised €150mn ($159.8mn) at a first close for its maiden GP stakes fund in March 2023. The fund has a €400mn ($426.1mn) target.

‘In the US, more than 40% of the big GPs have opened their capital, and they tend to perform better than their peers,’ Renaud Tourmente, Deputy Chief Executive Officer and Chief Operations Officer, at Armen told Preqin News. ‘We felt there was a market gap in Europe, where there are maybe 800 eligible GPs that meet our criteria and want to take their firm to the next level. In addition to the cash we bring in, we help them with direction and advice on strategic and operational issues like ESG, cybersecurity, talent management, or investor relations.’

So far, Armen has taken stakes in French firms Private Corner, B-Corp certified investment manager RGREEN Invest, and technology-focused Jolt Capital, in which it will take a stake of up to 32%.

The tougher macroeconomic environment, lower number of PE exits, and reduced commitments to funds by LPs, as well as internal financial challenges and succession planning, have created a more fertile environment for GP-stakes sales. In addition to providing GPs with growth capital, benefits from external investment include business development and talent enhancement advice.

Global law firm Dechert in November reported that 59% of GPs intend to sell a stake in the next 24 months to spur growth. Of the total, 64% of North American GPs said they were planning to divest a minority stake, followed by 57% and 50% of their EMEA and APAC counterparts, respectively.

‘We’re seeing a larger number of fund platforms and investors who want to enter different markets. They see this as an efficient, fast-tracking way to gain access to an industry or market they don’t have exposure to while simultaneously gaining a revenue share,’ said Sabina Comis, Global Managing Partner at law firm Dechert.

For Jolt Capital, geographical expansion was among the benefits of the stake sale to Armen. As a result of the investment, the firm said it would ‘have the resources to develop a deep tech platform and expand from a strong base in Europe to North America and Asia’.

Jolt reopened its fourth fund, which had closed on €271mn ($288.2mn) in September 2021, at the beginning of 2023 and raised an additional €100mn ($106.3mn) from existing investors as well as newcomers, including a European sovereign wealth fund and several large family offices.

‘With the success of our last fund, Jolt Capital IV, we have become one of the leaders in growth investment in European deep tech companies. With this strengthening of our capital base, we are preparing to expand our presence in Europe and beyond,’ Jean Schmitt, Chairman and Managing Partner of Jolt Capital, said when announcing the Armen investment in February.

Meanwhile, LPs are also stepping up their activity. The number of GP stakes investments by LPs also hit a record in 2023, with six deals struck last year, up from just one in 2022. Bank of Montreal, OMERS, UK savings and retirement firm Phoenix Group, Daily Mail, and General Trust were among the institutions completing investments.

For LPs, the motivations for investing in private capital fund managers are often broader than those of their GP counterparts, with reasons including access to a stable, yield return from management fees, a share of carried interest, as well as preferential access to co-investments and portfolio companies.

‘While traditional fund structures are likely to remain the primary way for investors to seek exposure to private equity, investing in GP equity provides an alternative,’ Cameron Joyce, SVP, Research Insights at Preqin wrote in the Preqin 2024 Global Report: Private Equity. ‘Compared with investing in funds directly, where the investor retains the majority of the economic benefits, investors in GP equity will instead benefit from management fees and residual carry only once partners have been paid. These earnings provide a significant yield on investments, which can contrast sharply with fund investing given the nature of J-curves.’

Grant Murgatroyd contributed to the reporting for this article.

_{The opinions and facts included within the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin providing the information in this content accepts no liability for any decisions taken in relation to the above.}