GP stakes in Private Equity: An Empirical Analysis of Minority Stakes in Private Equity Firms

Sammanfattning: This study examines the phenomenon of minority stakes in Private Equity firms ("GP stakes") and specifically the motives behind such deals and their fund-level impact on target firms. We use a unique dataset on GP stake deals between 1988-2020 to empirically analyze the motivations behind GP stakes using logit regressions and their fund level impact using a Difference-in- Differences (DiD) approach with fixed effects. Our results show that large, younger PE firms with a high fund-size growth are most likely to receive a GP stake. The results further show that investors in GP stakes are more likely to have a large AUM, have invested in many funds and engage in co-investment activity. By type, they tend to be fund-of-funds managers and sovereign wealth funds. As for the fund level impact of GP stakes, we find that they have no significant effect on neither subsequent fund-size growth nor return performance. Our results indicate that the official reasons communicated by PE firms for selling a GP stake - to fund new strategic initiatives, enter new markets and increase capital commitments to new funds - are not the actual reasons. Instead, we argue that the real motivation behind selling a GP is for owners to realize value. Regarding investors' motivations for acquiring a GP stake, our analysis shows that only a minority of GP stakes invested in are acquired by previous LPs in target manager's funds. We therefore argue that interest alignment in an existing GP-LP relationship does not seem to be the main motivation for investing in a GP stake, but that it is rather a novel and attractive way for investors to get exposure to Private Equity, the associated illiquidity premium and the unique risk-return characteristics that the investment offers.