Listen: Private Markets 360° | Episode 16: Staking Claims - Inside the Business of GP Stakes

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Jocelyn Lewis

Hello, and welcome back to Private Markets 360°, S&P Global's podcast dedicated to enlightening and educating our listeners about the world of private markets from vast vantage points. Your Private Markets 360° co-hosts both sit within Market Intelligence. I'll start off with introductions. I'm Jocelyn Lewis, Head of Private Debt Commercial Strategy.

Chris Sparenberg

And I'm Jocelyn's co-host, Chris Sparenberg, Head of Private Markets Commercial Strategy. I'm a super fan of our corner of the investment industry. My background includes time at Cambridge Associates on the portfolio monitoring and benchmarking team as well as roles in go-to-market at firms like eVestment, Nasdaq, and Juniper Square. I'm excited to be joining the podcast. We're thrilled to bring our listeners exciting guests every month for discussions about industry trends and other topics of interest here on the podcast.

Jocelyn Lewis

We sure are, Chris. And if you're interested in regular Private Markets content, hit subscribe, and tune in. Ready to introduce our guest, Chris?

Chris Sparenberg

Let's do it.

Jocelyn Lewis

Welcome back to Private Markets 360. Your insider's guide to the world of private investments. Today, we're delving into the dynamic realm of GP stakes with a true expert in the field, Anthony Maniscalco. Anthony is the Managing Partner and Head of Investcorp's Strategic Capital Group, where he spearheads efforts to acquire minority interests and forge long-term strategic partnerships with midsized alternative asset managers.

Since its launch in 2019, Investcorp's Strategic Capital Group has focused on partnering with well-established GPs with successful track records, which are poised for growth in the private equity, private credit, and real estate sectors. Anthony brings a wealth of experience, having led his team through 12 GP stake investments to date. Anthony, it's a pleasure to have you join us. Thank you for being here. How are you today?

Anthony Maniscalco

Yes. I'm great, and thank you very much for hosting me. I'm very excited to have the opportunity to describe the GP staking industry and provide some color to your audience.

Chris Sparenberg

Anthony, I think that's a great place to start. Our listeners are going to be fascinated with this topic. Could you start us off with an overview of what GP Stakes investing is? And we'd also love to hear more about your professional journey into this segment.

Anthony Maniscalco

Great. GP Staking is the acquisition of a minority equity interest in the management company and general partnership of an alternative asset management firm. Unlike investing into their funds as an LP, we buy equity in the parent, in the company, in the firm.

What this provides is true alignment with the equity owners of the asset management firm and that we own all the fee streams, the management fees, the carry, and their own balance sheet returns on their GP commitments into their funds, which again, creates true alignment. We benefit from growth of the firm. We benefit from new products being launched. We benefit from increasing profitability. We are truly aligned as an investor and partner into the GPs.

Jocelyn Lewis

And could you tell us more about your own professional journey into this space?

Anthony Maniscalco

My journey in GP staking really began over 30 years ago in finance in the Midwest, where I was initially a private credit lender at a small bank out of Chicago, transitioned from there into a role in leveraged finance, where I covered private equity firms for 15 years financing buyouts initially at BofA and then ultimately, at Lehman Brothers.

Then in 2007, 2008, I moved over within Lehman into a group, where I covered alternative asset managers as companies. I really focused on supporting them in growing their businesses and growing their franchises. That was accomplished primarily through selling equity in their platforms. This is really at the initiation of the GP staking industry, where I covered what we call GPs, which are the asset management firms and advise them on selling stakes to some of the other players that spun out of investment banks.

I lived through the bankruptcy at Lehman, was at Barclays for 5 years as an adviser, one of their -- really the early advisers on these types of transactions. And then in 2012, I had the opportunity to transition from being an adviser to a principal at Blackstone.

I was the first hire and was co-head of Blackstone staking business, built that into a $3.5 billion-plus platform focused on GP staking. Ultimately from there, I made my way to Investcorp roughly 6 years ago, where today, I lead the GP staking business, which is a $1.5 billion AUM group that has partnered, as mentioned, with 12 GPs across the entire private market landscape, including buyout, private credit, real assets, secondaries, noncontrol equity.

Jocelyn Lewis

How fascinating, you've had quite the career journey. Working, I guess, through the Lehman bankruptcy itself is pretty fascinating. But then also looking at alternative asset managers as companies. And you mentioned early on having that alignment with your partners, which is just such an essential but very important concept. So Anthony, could you share a little bit about those origins of GP stakes? And what is the history of this area of the private markets, and what leads to the opportunity is to invest this way?

Anthony Maniscalco

Absolutely. This is an industry that really got its start prior to the great financial crisis where investment banks would acquire minority interest in primarily liquid hedge fund or liquid credit managers with the intention of gaining more business, gaining more prime brokerage, more sales and trading.

At the same time, larger institutional investors were investing into private market managers, mostly to get access to their funds. They would invest 10%, 20% equity stakes. And for that, they would have access to future funds on a committed basis.

When the GFC happened, that was all shut down both on the investment banking side and the institutional side and a couple of funds were formed out of that market that really focused mostly initially on the liquid end of the market, meaning buying stakes in hedge funds and liquid credit.

And the reason for that is that the teams that form these funds all came out of the investment banks, and that was their background. The industry progressed for several years. There were a couple of new entrants.

The amount of capital raised grew very rapidly. And by, call it, 2015, the amount of capital raised had increased to north of $10 billion in this space. What that drove was the buyers, the funds that were formed to do this to focus on larger managers and because they had to deploy large amounts of capital.

At the same time, in 2015, the first transaction focused on the private markets occurred. And the light bulb went off in our industry that it was better ultimately from an enterprise value standpoint and an equity investment standpoint to own a stake in a private market manager, private equity, private credit than a manager of liquid hedge fund strategies where their clients could walk out the door in a 3-month period.

That really drove the movement of the industry to the private markets in 2015. And today, where it stands is those same groups have now raised north of $40 billion of capital, which has driven them even more upstream in terms of size, GP, and it's left a very attractive opportunity in the middle, midsized firms, which we define as asset management firms or GPs that manage somewhere between $1 billion and $10 billion of capital.

These are not start-ups. They're not on their first fund. They're on fund three, four, five, six, or seven, but they have the scale in place and the growth in place that makes it a very attractive part of the market. It's also a part of the market where there's over 1,000 investment opportunities, whereas in the larger end of the market, it's becoming much more limited right now.

Today, where the industry stands is you have really three segments. You have the large-cap segment, the mid-cap segment, which is where we operate. And then you do have firms that provide seed capital or accelerator capital to very early-stage private market managers.

Jocelyn Lewis

That's fascinating, Anthony. I'd love to go deeper into the investment strategy here. What are the aspects of a manager that you're looking for when you invest? And can you tell us more about your investment thesis?

Anthony Maniscalco

We're very much focused on parts of the private market industry, where we believe there's tailwinds. For example, today, within buyout, we're focused on GPs that have either a value orientation, meaning they buy businesses at an attractive price, and they're able to improve the cash flows, improve the businesses through a deep bench of operating partners within buyout. We also like sector specialists, businesses, again, that we believe have real tailwinds in the environment we're in.

Then as we go more micro, we're focused on top quartile, top decile performing GPs because at the end of the day, their ability to raise capital in the future is really driven by the fact that they're generating strong returns for their investors.

We also like businesses we believe are at an inflection point where our capital and our partnership could help them achieve their objectives and help them achieve growth. That's important to us.

That alignment, being aligned with what the strategy is and the objective is, going into the investment is critical to us. We also -- I'll finish it off. We like businesses, where they're putting their capital back into the firm, meaning we seek to avoid situations where we're investing into a GP and they take that money off the table. We want them to reinvest that capital back into the business. And again, that creates very strong alignment between us and the GPs.

Jocelyn Lewis

And where you mentioned you've been doing this for quite a while now, too. It seems that you've really kind of honed in on your sweet spot in this space, which is excellent.

Anthony Maniscalco

We have. And we like that part of the market also because unlike the upper end of the market where it's become very process-driven, there's typically an investment bank that is hired to pursue a broad auction, reaching out to all identified buyers, putting in place a SIM or a memo, putting in place a model, a term sheet, providing access to management and then requesting bids. In our part of the market, it doesn't always work that way.

For us, specifically, we're focused on how can we get direct access to the GPs, build chemistry, build a relationship, not push a stake sale on them. But when the opportunity presents itself, when they have a need for that capital, we're in a position to engage with them directly.

That's more available in the middle market than it is in the upper end of the market, and we like that dynamic because we believe, ultimately, we can put in place the right partnership plan. We can price the asset correctly. We can be bespoke and creative on structure. All the investments are not the same. We're really trying to solve a problem for the GP, while at the same time, creating more downside protection through the structure for our investors.

Jocelyn Lewis

And Anthony, when thinking about GP stakes, what makes this a compelling area to invest in for both you and your investors?

Anthony Maniscalco

It's a way of getting access to the private markets on a highly diversified way because we're investing across asset classes, underlying strategies within those asset classes, vintages as well as geographies. First and foremost, it's a way of getting diversified access to the private markets. It's also a way to get that access in a way that delivers a current income component.

As we make our investments into the GPs, again, we own all the legacy management fee profits, all the unrealized carry in the ground at the time of acquisition, and that provides a stable cash flow stream, particularly around the management fee profits because those are highly protected cash flow streams.

And these are also highly profitable businesses. So the way investors look at the space is they're getting capital appreciation and growth associated with a private equity investment, but they're doing so on a current income basis that if you care about yield is a very high yield. If you care about derisking, it's a way of getting your capital back significantly quicker than you would in a regular way buyout fund, for example.

In a buyout fund, they invest over 5 years, and they realize those assets over 3 to 5 years. In our strategy, investors see income typically within 6 months based on investing into GPs that are already cash flow positive. We believe those dynamics make the strategy compelling and have been what has really driven the amount of capital flowing into our space over the last 10 to 15 years.

On top of that, I would just add that one of the early considerations for investors in our space because many investors, they understand the current income. They understand the exposure to the private markets, but they question how they ultimately get their capital back.

And our approach is really very much to think proactively around how to get liquidity back to our investors and ultimately, how to realize and monetize the portfolio, either individually or selling the assets we own in bulk. If you look at our space, there's been a significant increase in velocity around sales to control strategic buyers, sales back to management as well as sales for us to the larger cap buyers in our space, which really creates an opportunity.

Ultimately, what we'll do with our GP investments is we'll support them in creating as much value as we can in their business. But at some point in time, we'll sit down with them and have a discussion whether there may be a better owner of that equity than us.

This is 7, 8, 9 years into our investment where maybe, that GP wants to bring on a control investor. That GP is closer to their own retirement, and they believe they can optimize their platform by selling to one of the larger alternative asset management firms or a larger traditional asset manager, or to an insurance company. But really, our job is to spend time with them, understand their objectives, and then ultimately, find another partner for the equity that we own.

Chris Sparenberg

Let's talk about Investcorp's place in the market. What are the elements of your business that set Investcorp apart from other GP stakes managers?

Anthony Maniscalco

As it relates to our business in general, we are part of Investcorp. We are a line of business with Investcorp. Investcorp is a $50 billion-plus alternative asset management firm that has maintained conviction over the last 40 years on the middle market and the private markets and has done so unlike most other alternative asset managers focused on the middle market, it's done so globally.

We have offices in the U.S., in Europe, in the Middle East. in Asia, and that really supports our business in terms of providing a global perspective on what's happening in the markets, but also the firm has businesses around private equity, credit, real estate, infrastructure, and that also helps us identify who we believe are the best performing GPs and get really strong oversight and governance from the firm as it relates to the GPs.

Specific to our business within Investcorp, we have 12 people focused on the strategy across sourcing, execution, post-acquisition value delivery, data analytics. We have 17 advisers and operating partners. The Advisory Board is led by former Governor Jeb Bush. He is one of our senior advisers. He was a colleague of mine going back to Lehman and Barclays.

Our Board includes Larry Wieseneck, who's the Global Head of Investment Banking at TD Cowen. It includes Tina Williams. Tina is the CIO, founder of Xponance, which is one of the largest traditional asset managers in the U.S. owned and founded by women of color.

We've created this group that have very deep networks and perspectives on the markets that is very valuable to us and our GPs. As it relates to how we work with GPs, we are very hands-on in supporting them, raise capital, supporting them, thinking through how to build out their platform, and importantly, helping them build out the infrastructure necessary to support the asset growth.

That's one critical area of focus in that these are firms that are a bit younger. They're, again, at an inflection point of growth. As they grow, we need to ensure that they have the infrastructure to support that growth. And that's areas that we focus on. We've really going back to being in the space for the last 15 years, really seen the evolution and have a strong sense of how we can be the best partners to those GPs in the middle market where we're focused.

Jocelyn Lewis

Well, it certainly seems that you've been very thoughtful about your infrastructure and ensuring that not only you have the right foundation, you mentioned all the personnel that you have, but your kind of Board, your investment professionals as well. So that's really excellent to see. And Anthony, looking ahead, what does the future hold for Investcorp's Strategic Capital Group? And how do you envision the evolution of these strategies and investments in the GP stakes market over the coming years?

Anthony Maniscalco

We want to remain at the forefront and continue to be innovators. We look for ways that we can differentiate ourselves on behalf of our LPs. So for example, in the last 6 weeks, we entered into a partnership with a group called Securitize, which allows investors to come into our vehicles through blockchain technology, allowing smaller tickets, allowing more efficient onboarding and also, allowing ultimate trading of those shares.

That's just an area where we are ahead of our peers in terms of innovation. We are the first staking platform to build out an operating partner network that work on-site, hands-on with our GPs across multiple aspects of their business, ranging from human talent to ESG to succession planning to branding strategy, really providing those resources in an exclusive manner to our GPs. We're going to stick to the middle market.

Our conviction has only grown in terms of the attractiveness of being in the middle market. We are also going to start to expand most likely into areas, where we can continue to focus on the middle market, but ultimately offer more solutions beyond GP staking, beyond buying equity, potentially providing GPs with preferreds at the management company and the GP, or providing them with debt offerings, really, again, trying to provide a full suite of solutions to our target universe of 1,000-plus midsized private market GPs.

In addition to other areas of innovation such as Securitize and our operating partner network, we've established channel partnerships with groups, where we believe their expertise can complement our operating partner network.

For example, we recently entered into a channel partnership with a group called DiligentIQ, which was founded by Ed Brandman. Ed spent 12 years as the Chief Information Officer at KKR and is building a business around generative AI, really focusing on how private market managers could utilize that technology in their own investment processes and in their deal processes.

We have, again, partnered with Ed and DiligentIQ around supporting our own GPs as they work through how to utilize that generative AI into their own investment processes. Just another example of how we look to work with our GPs and support them across their entire businesses.

Chris Sparenberg

And a great example of the platform scale that GPs in general give to their portfolio companies or other assets, so really interesting to hear about.

Anthony Maniscalco

Thank you.

Chris Sparenberg

And I think shifting focus for this next question. We know from speaking to you previously that professional development and particularly that of early career professionals and those looking to make a move into private markets from other segments is something that's very important to you. Could you share some of the advice that you give to people who are in this position? How should someone who wants to break into private markets go about it?

Anthony Maniscalco

I have some thoughts for people coming into finance in general in terms of what can create their success within our industry. First is be likable, meaning people like to work with people that are likable. And it's just human nature. That's critical. That allows you to build out your network, that allows you to be referenceable and allows you to continue to grow within the firms you operate in. Be the first in and last out when you start. You need to demonstrate your ability to, in many ways, grind and work hard, and build your personal brand. Build your network, and this goes back to likable.

But when you're young, you really need to establish the foundation of your network. That means meeting people, staying in touch, going to lunches, getting drinks, that's critical. Learn to problem solve. When asked to execute on a task, figure out how to get it done versus just questioning why you are given that task. People want to work with people that are able to accomplish tasks and are able to problem solve. And then lastly, as important is life in your careers are not going to be linear.

You're going to face difficult times. You'll face challenges, which many are outside of your own control and how you manage through and pick yourself up is what will ultimately define you in your career. I have found that in my own career, I went through my journey. It wasn't. It definitely was not linear. There's been bumps along the way, but really being able to manage through those and get up and roll up your sleeves and move forward, that really is what defines your character and defines your success in our industry.

Chris Sparenberg

It certainly resonates with me.

Jocelyn Lewis

Excellent advice. Same. I couldn't agree more.

Chris Sparenberg

Well, Anthony, thank you for joining us today. It's fascinating to learn more about GP stakes, its role in private markets investing and certainly, to hear more about your thoughts on both the market and the people within it. We wish you and the team continued success, and we'll certainly be following your good work in the future. Thanks again.

Anthony Maniscalco

Thank you very much for having me.

Jocelyn Lewis

Thank you, Anthony.

Chris Sparenberg

Thank you again to our wonderful guest for a great chat today. Really appreciate everyone listening in. If you're looking for more Private Markets content, subscribe to catch future episodes, and listen to our earlier episodes wherever you listen to podcasts. Cheers, everyone.

Jocelyn Lewis

Thank you so much. You can also subscribe to our monthly Private Markets 360°newsletter. The link is in each episode bio, or connect with us on LinkedIn. Have a great day.