GP stakes: Deal issues in a growing and evolving market

Background

History of GP stakes investing and development of the market

LPs acquiring minority ownership stakes in large private equity and other private capital fund managers began on an ad hoc basis in the early 2000s. For the GP cementing a strategic relationship with one or more deep pocketed sovereign wealth funds or pension funds by having them participate in the GP’s ownership was seen as a way of building a core foundation to the GP’s current and future fund raising activity. For the LPs involved, the attractions were putting themselves at the front of the GP’s queue for allocating fund and co-investment investment opportunities, while at the same time being able to participate directly in the economics of the GP’s own income streams.

Over time, GP stakes investing became a recognised investment strategy in its own right, with a select number of large investment managers raising funds to invest in the strategy. This opened up the market to mainstream LPs without the firepower or expertise to invest directly in GP stakes.

In the United States, where the market is the most established and institutionalised, the competition to invest in the largest private equity buyout and other private capital fund managers has led to a growing market for GP stakes investing in mid-market buyout firms.

In the UK and Europe, which do not have the same depth of large scale GPs as in the United States, the market opportunity is seen to be in the mid-market, with both U.S. GP stakes funds and local investors active.

Commentators take differing views of the potential of the GP stakes investment market in Asia. Although some think Asia is an untapped market, others point towards a relatively immature private equity market and suggest that the opportunities will be limited, at least until there is a greater depth of investable GPs.

Transaction drivers in GP stakes investing

General partners

Access to capital through a GP stakes investment can help GPs with the following challenges:

• GPs face growing demands for capital for firm infrastructure development, for example, this could include hiring specialist employees, AI/technology investment, or investing in another firm/strategy, such as adding private credit or real estate offerings to an existing private equity platform.
• Funding the increasing requirements for GP commitments to new funds.
• Finding the capital to provide liquidity to address succession issues. This can particularly be an issue for mid-market funds where the founding team are approaching retirement. Liquidity can also be sought to provide a full or partial exit for existing minority investors.

In addition to meeting GP’s capital requirements, one of the key drivers for the early wave of GP stakes investments was the desire on the part of the GP to develop a long term strategic relationship with one or more deep pocketed LPs to provide cornerstone investment for future fund raises. This remains of importance to GPs, particularly early-stage and mid-market GPs in a crowded fund raising marketplace.

Investors

Investors in GP stakes can be either direct investors (specialist GP stakes funds or sovereign wealth funds, family offices or other investors), or indirect LP investors in GP stakes funds. The attractions to investors of a GP stakes investment include:

• An attractive risk/return profile. GP stakes investments offer the right to participate in the GP’s management fees. Such a participation offers predictable cash flows when compared with the returns from gains made on portfolio company exits, which provide the bulk of the returns to LPs from a traditional private equity fund investment. In addition to participation in a GP’s management fees, a GP stakes investment will also have upside from the right to participate in exit and other returns flowing from the GP’s commitments to the funds managed by it and also carried interest in relation to those funds. Finally, as the GP’s platform grows, investors can realise capital gains on their equity stake following a sale or other liquidity event.
• Benefits from the long-term relationship with the GP for sovereign wealth funds, family offices and other non-GP stakes fund investors can include access to investment opportunities in the GP’s future funds, co-investment opportunities, and negotiated (lower) fees on future fund investments.

There is also a trend of fund managers making majority or minority investments in other GPs, to acquire an existing platform for market consolidation, or to gain access to new strategies and markets.

Legal issues for GPs and investors in GP stakes investments

Legal due diligence

In addition to the commercial due diligence a GP stakes investor will undertake on a GP’s people and culture, business model, operations and cash flows, an investor will also undertake legal due diligence.

Legal due diligence will cover both diligence of the GP itself and diligence of the funds which underpin the GP’s future cash flows.

GP level diligence will examine corporate, regulatory and tax structure and GP shareholder arrangements, as well as the structure of the carried interest.

Fund level diligence will involve a review of the underlying documentation of the funds under the GP’s management.

Transaction structuring issues

GP stakes investments are typically equity investments, although an element of debt or preferred equity investment is also sometimes incorporated. The investment may be made all up front, although a staggered investment in tranches is also possible, dependent upon the GP’s requirement for funds.

Most investments are primary (share subscription for capital investment), but may have a secondary element (share sale and purchase for providing liquidity to the founding team or other shareholder).

One of the key structuring issues will be how to structure the investor’s acquisition of a share in the carried interest in the funds managed by the GP, which will not usually be vested in the GP company but held through a separate investment structure (typically a limited partnership “carry partner” in the relevant funds).

As well as the terms of the investment transaction itself (discussed below), the parties will have to find mutually acceptable tax structuring solutions and address any regulatory issues arising from the investor taking a shareholding in the GP (for example, where a change in control application is required as a result of a relevant shareholding threshold being triggered or the planned growth of the business requiring additional regulatory authorisations).

Investment terms: Investor issues

Transaction terms which an investor will need to consider include the following:

• Rights to investment streams: As mentioned above, the investment streams which are potentially available to GP stakes investors are management fees (net of expenses), returns from the GP’s co-investments and a share in the carried interest available under the terms of the funds managed by the GP. One of the questions that arises in negotiating a GP stakes investment is whether the investor is entitled to carried interest only in funds launched in conjunction with or after the investor becomes a shareholder in the GP, or is also entitled to a share of carried interest in existing funds.
• Governance: Investors will expect a board (or observer) seat on the GP’s board, and customary reporting and information rights. It is recommended to manage up-front any conflicts of interests between the GP and its LP investors.
• Contractual shareholder protections: Investors will want a range of contractual protections. Protections will include consent rights designed to protect an investor’s shareholding in the GP. Other contractual protections may include anti-dilution rights (with potential restrictions on additional third-party investors in certain situations) and certain constraints over the GP and its executives – investors will want to see lock-ups in respect of shareholdings and restrictive covenants for key team members. Investors will not expect to have any control over operational matters such as investment decisions or team management. Investors, may however, have controls over the type and/or level of expenses to be incurred or deducted in calculating net management fees available for distribution to the investor (so as to protect its share of the income stream coming from management fees).
• Exit: Investors will expect to have their investments subject to lock-ups and any sales of shares after that lock-up period subject to rights of first offer, save for pre-agreed permitted transfers to affiliates. GPs may, however, insist on either GP consent to all share transfers by an investor or to rights of first refusal after a lock-up period. Other exit rights investors will expect include tag-along rights on a sale and participation rights on any sales pursuant to an IPO. The parties will need to calibrate these rights and restrictions for the most likely exit route for the shareholders, such as a full joint sale or an individual sell-down.
• Fees on fund investments and co-investment opportunities: Where the intention is that the investor will invest in any current or future funds raised by the GP, the investor will want to agree preferential terms for its investment, in terms of fees and side letter terms. The investor may also seek commitments or comfort on future co-investment opportunities.

Investment terms: GP issues

Key transaction terms for the GP will include the following:

• Valuation.
• Retention of full operational control over its business.
• Control over transfers of the investor’s shares in the GP, either in the form of a consent right over transfers (as a minimum in relation to transfers to competitors) or lock-ups followed by a right of first refusal.
• Restrictions on the investor’s rights to provide information to third parties.
• Drag along rights over the investor’s shareholding so as to retain control over any ultimate exit.
• Where there is an expectation that the investor will invest in future funds launched by the GP, the GP will want to consider the consequences of the investment not being forthcoming.

Negotiations

The negotiation of the transaction will be very different based upon the size and level of institutionalisation of the GP and the transaction process.

A large, already institutionalised, GP is likely to run a competitive process with multiple bidders. Flexibility in the terms offered to the ultimately successful investor will be fairly limited.

A transaction with a mid-market GP, for example where the GP’s key executives need to address succession issues, is likely to require flexibility on both sides to find an acceptable outcome. There will be much more give and take in negotiations than in a GP stakes transaction for a larger GP which is more likely to be seen primarily as a financing transaction.

How might the market develop from here?

A GP stakes investment is another option in the GP’s toolbox that can help address some of the challenges GPs face, particularly access to capital and, in the case of mid-market GPs, succession management.

The market for GP stakes investing in large GPs is dominated by the world’s largest asset managers and a handful of GP stakes funds. An article published by PitchBook on 27 February 2025, “Firm consolidation prices out GP stakes private equity investors”, highlighted that in 2024 more of the large asset managers were looking to make strategic, control acquisitions of private equity and other private capital funds rather than taking an investment stake, and that “U.S. private equity bought more asset managers in 2024 than ever before, and its dealmaking is crowding out dedicated GP stakes investors.” It went on to say that the majority of the transactions in 2024 were controlling, strategic stakes in other firms, that non-control transactions comprised less than half of the deal flow and deals made via GP stakes funds were even less common.

With strong competition in the large GP stakes market, commentators anticipate that there will be further growth in the U.S. and the UK/European markets for mid-market GP stakes investment transactions. The available cohort of potential GPs which might benefit from a GP stakes investment is increasing, with the number of transactions being driven by demands for capital, difficult markets for fundraising and exits, and the desire for founders to monetise some or all of their investment. The Asian market is at an earlier stage of development, but it is also likely to be a growing market over time.

With more opportunities for GP stakes investments, we can expect to see more managers launching GP stakes funds and for more LPs to be attracted to the more predictable cash flows offered by GP stakes investments.

Transaction execution and next steps

A growing market for investing in mid-market GP stakes does not necessarily mean that transaction terms for these transactions will become more standardised. In the case of mid-market GPs trying to deal with succession planning and institutionalisation of the firm, a GP stakes transaction is a key transaction. Although there will be many common issues in these transactions, the parties will need to demonstrate flexibility and sensitivity in approach to get to a successful outcome.

Hogan Lovells can help you navigate your way through a GP stakes transaction.

Authored by Ed Harris, Adam Brown, Cees Brouwer, Siew Kam Boon, Michael Wong and Graham Nicholson.