Why GP stakes and secondaries units are integrating

Blackstone’s move to combine its GP stakes and secondaries businesses raises questions about how players in both markets should address potential conflicts of interests.

The natural links between GP stakes and secondaries have led to players in both markets exploring ways of combining the two strategies.

Blackstone is the latest example. In February, the firm said its secondaries division would absorb its GP stakes unit: the GP stakes business is now part of Blackstone Strategic Partners, its $69 billion secondaries business.

Other recent examples of convergence of the two strategies include GP stakes giant Blue Owl Capital launching its own secondaries business last August; Apogem Capital, which invests via secondaries funds, collecting $1.1 billion in January for RidgeLake Partners I, a GP stakes joint venture with OA Private Capital; and European GP stakes firm Armen, which has pedigree in both spheres after co-founder Dominique Gaillard brought over 20 years’ experience from secondaries powerhouse Ardian.

The industry has also seen an increased number of GP stakes transactions involving secondaries firms in recent months. Last year, secondaries pioneer Coller Capital sold a minority stake in itself to Hunter Point Capital, while in February, Banner Ridge Partners sold a stake to Investcorp’s Strategic Capital Group.

Inherent similarities 

Something common to both GP stakes and secondaries strategies is the due diligence process at the manager level. In secondaries transactions, buyers need to conduct due diligence on the underlying portfolio companies or LP interests being sold, as well as the GPs managing those assets. For secondaries buyers looking to venture into the GP stakes arena, being able to leverage their existing network of manager relationships is a critical edge.

“[Strategic Partners’] secondaries business can help [the GP stakes unit] source transactions. We know over 1,600 GPs and we can share our knowledge about the quality and future growth potential of these GPs,” Verdun Perry, global head of Blackstone Strategic Partners, tells affiliate title Private Equity International. “GPs tend to work with people they already know, trust and respect.”

Both GP stakes and secondaries boast shallow J-curves, while terms for GP stakes vehicles can also closely resemble those of secondaries funds, which often come with a 1 percent management fee and 10 percent carry. It stands to reason that the two units could find traction with the other’s LP base when fundraising.

“Having the GP stakes business as part of [Strategic Partners] should help us be a better secondaries buyer,” Perry says. “It does make us a better counterparty, because GP stakes adds another offering to our product line to provide solutions to both LPs and GPs… It’s just a logical extension of that solutions-orientated business.”

GP stakes could emerge as an important expansion strategy for secondaries players, according to Christopher Robinson, co-head of the secondaries transactions and liquidity solutions practice at law firm Proskauer.

“I think you will start to see these adjacent strategies overlap more as secondaries firms look to solve for liquidity constraints,” Robinson says. The rapid rise of the secondaries market will continue as secondaries firms find the right opportunities to partner with high-quality sponsors and assets, he adds. GP minority stakes are a tool in their belt to further partnerships.

The secondaries market hit a new fundraising record amid continued market dislocation last year: a total of $117.92 billion was raised across all asset classes in 2023, more than double the previous year’s $53.58 billion, according to Secondaries Investor data.

Minimising conflicts of interests

The integration of GP stakes and secondaries comes with potential misalignments of interests. According to Perry, there is a strong wall between Strategic Partners and the wider Blackstone organisation to ensure GP information gathered by the former is not shared outside of the secondaries division.

Strategic Partners is able to execute on the large number of secondaries transactions it does – acquiring second-hand stakes in competitor GPs’ funds and backing competitors’ continuation vehicles – thanks in part to this separation.

“GPs tend to work with people they already know, trust and respect”

Verdun Perry,
Blackstone Strategic Partners

The GP stakes unit will be walled off from the wider Blackstone business in the same way that Strategic Partners is siloed, Perry adds. In terms of the GP stakes unit’s capacity to provide resources to firms it invests in, Perry says it “will have access to the huge breadth of resources typically reserved for Blackstone’s portfolio companies”. Much of the expertise shared with managers by the GP stakes unit – like how the broader firm creates value for portfolio companies – doesn’t require access to confidential information, he adds.

Even if partnering with secondaries teams means GP stakes investors are unable to offer operational expertise to the GPs they invest in, it is unlikely to deter GPs from accepting capital, according to a lawyer specialised in GP stake transactions.

“I wouldn’t say they really have much input on operations,” the lawyer says. “A lot of the GP stakes funds market themselves as providing enhanced distribution to the sponsors… Candidly, that’s not a major part of doing the deal. The more compelling reason to do the deal is just the capital they provide to the GPs.”

In the case of Blackstone’s integration of its GP stakes and secondaries businesses, the main source of conflicts lies in whether Strategic Partners will invest in continuation vehicles or buy second-hand stakes in funds of managers with whom the GP stakes business owns an interest, according to the lawyer.

“We absolutely have the right to do that, but we are going to proactively disclose to LPs before commitment so everyone’s aware,” Perry says.