Key Takeaways
- • Macfarlanes outlines a toolkit of GP capital solutions, including GP stakes, GP financing (manco and GP commitment facilities) and preferred equity, each offering a different balance of dilution, leverage, flexibility and cost.
- • GP commitments have risen from a historical benchmark of roughly 1-2% of fund size to 2-4% more commonly, especially among mid-market and emerging managers.
- • Manco facilities are underwritten primarily on the contractual, recurring management fee stream, while GP commitment facilities are repaid mainly from realisation proceeds on the GP's own fund investments.
- • GP stakes investors typically target management fee exposure, with carried interest valued less attractively, and hold periods often exceed the four- to six-year private equity norm.
- • Preferred equity is positioned as a hybrid that avoids permanent dilution of ordinary equity while offering more flexible repayment than debt.
Summary
According to Macfarlanes, private capital managers now have access to a broader and more sophisticated range of financing and growth capital than before. The firm identifies three main drivers of demand: funding GP commitments, wider growth capital, and succession planning. Investor expectations for GP commitments have risen from a historical norm of around 1-2% of fund size to 2-4% more often seen today, particularly among mid-market and emerging managers seeking alignment. A slowdown in realisations has also left many GPs with temporary liquidity gaps when funding those commitments. Growth capital is being sought to fund new strategies, team hires and office expansion. Succession is another driver, as founder-owned managers that have grown significantly seek liquidity while next-generation team members look to acquire larger stakes.
GP stakes transactions involve the sale of a minority equity interest in the manager or its parent, typically to a dedicated GP stakes investor rather than a strategic buyer, which generally seeks a majority holding. The principal aim is exposure to management fees, with some exposure to carried interest, which is valued less favourably. Proceeds are usually a mix of primary capital and secondary sales by founders or senior executives. Macfarlanes notes that GP stakes funds have traditionally not committed to the target's funds, though family offices and sovereign wealth funds are increasingly offering more flexible terms. Over the past decade, GP stakes funds have developed liquidity tools such as management fee securitisations, listings of GP stakes portfolios and strip sales, reducing pressure on managers to pursue an early exit.
GP financing refers to debt at the management company or GP level, which allows capital to be raised without ongoing equity dilution. Manco facilities, which may be revolving, term or delayed-draw, are secured on manco revenues and underwritten mainly on management fees, which are contractual and payable regardless of performance, subject to step-downs and offsets. Carried interest is viewed as less reliable collateral given its dependence on hurdles, clawback and exit timing. GP commitment facilities fund the GP's share of a fund and are generally repaid from realisation proceeds, with lenders relying on guarantees, track record, strategy and loan-to-value metrics where little capital is yet deployed. Preferred equity ranks senior to common equity but junior to debt, providing a priority return without creditor status, and is increasingly considered as a hybrid alternative to GP stake sales or debt.
GP stakes transactions involve the sale of a minority equity interest in the manager or its parent, typically to a dedicated GP stakes investor rather than a strategic buyer, which generally seeks a majority holding. The principal aim is exposure to management fees, with some exposure to carried interest, which is valued less favourably. Proceeds are usually a mix of primary capital and secondary sales by founders or senior executives. Macfarlanes notes that GP stakes funds have traditionally not committed to the target's funds, though family offices and sovereign wealth funds are increasingly offering more flexible terms. Over the past decade, GP stakes funds have developed liquidity tools such as management fee securitisations, listings of GP stakes portfolios and strip sales, reducing pressure on managers to pursue an early exit.
GP financing refers to debt at the management company or GP level, which allows capital to be raised without ongoing equity dilution. Manco facilities, which may be revolving, term or delayed-draw, are secured on manco revenues and underwritten mainly on management fees, which are contractual and payable regardless of performance, subject to step-downs and offsets. Carried interest is viewed as less reliable collateral given its dependence on hurdles, clawback and exit timing. GP commitment facilities fund the GP's share of a fund and are generally repaid from realisation proceeds, with lenders relying on guarantees, track record, strategy and loan-to-value metrics where little capital is yet deployed. Preferred equity ranks senior to common equity but junior to debt, providing a priority return without creditor status, and is increasingly considered as a hybrid alternative to GP stake sales or debt.
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