GP Profile: Investcorp's GP stakes strategy sees strong dealflow ahead

“There is certainly heavy demand for capital – a lot of GPs want to take advantage of the market and see this as a good time for them to be investing,” said Maniscalco, who is head of Investcorp's Strategic Capital Group. “In our deals, we typically have the time and ability to be creative around structure, and we’re not slowing down. If we have a recession and it’s worse than expected, we might slow down the pace, but nothing we’re seeing in the near to medium term is problematic.”

Via its Strategic Capital strategy, Investcorp takes 10-25% stakes in GPs, often owning a portion of management fees and the unrealised carry and legacy fees in a deal. The strategy closed its first vehicle in April 2020 on USD 600m and has more than USD 800m in AUM, including co-investment, with stakes held across nine GPs.

The firm is now placing increased weight on certain factors when performing due diligence on its deals, reflecting the current macroeconomic environment. “We have to be a bit more conservative on the performance of the existing portfolio; valuations of these companies might have come down, and holding periods might have lengthened,” Maniscalco said. “The current environment may have an impact on the size and duration of future funds and fundraises in the space, as some other funds have not raised as much as they expected. We have to be more creative in our structures, so for example we might not take all the existing carry if there is too wide a bid-ask; we might have a structure where the GP can receive more proceeds if they earn more.”

In spite of these challenges, Maniscalco is confident that a mid-market GP stakes strategy is a good place for LPs to allocate their capital. “We think this part of the market is resilient; it has the potential to be a downside protected way of investing in private equity, delivering yield right now, whereas you may have to wait many years in a traditional PE deal for DPI,” he said. “In the medium to long term, we believe that more money will flow into private markets due to trends including retail investing. The top performing GPs should get the lion’s share of the capital going in.”

Building the strategy
Maniscalco joined Bahrain-headquartered Investcorp from Credit Suisse in 2018 to lead its new Strategic Capital division. Prior to his time at Credit Suisse, he was a founding partner of Blackstone Strategic Capital Holdings (BSCH), and also has previous experience, including his role as managing director and head of alternative asset management investment banking coverage with Barclays.

“Before my team and I joined from Credit Suisse in 2018, Investcorp had been evaluating the space, given its 40-year alternative investment history, primarily on the PE mid-market side,” he said. Although Investcorp has raised a series of institutional funds, the GP has historically used its balance sheet to fund its deals, affording it the freedom to deploy deal-by-deal. The option was important to Maniscalco and his team, he said, since they wanted the flexibility to be able to deploy capital before raising the strategy’s inaugural fund.

The mid-market focus of the GP stakes strategy was formed in part due to dynamics elsewhere in the GP stakes market. “I’ve been in this space for 15 years and saw that the market was moving up, with the main players raising a lot of capital for larger-cap GPs,” Maniscalco said. “We saw an opportunity in the mid-cap space, where we have more direct relationships with the GPs and can build chemistry, be it via our team or advisory board.”

Well-known large-cap players in the GP stakes space include Petershill and Blue Owl Capital (the listed GP incorporating Dyal Capital). In contrast, Investcorp’s decision to target mid-sized private markets managers sees it hone in on managers who have USD 1bn-10bn in capital over multiple funds.

Investcorp aims to be a “value-add” investor for its portfolio GPs, Maniscalco said. Their needs can include fundraising and product development support, as well as human capital or ESG assistance. Investcorp can discuss these needs with its potential investees, given that its deals are often bilateral, rather than via broad auctions, he said.

The right structure
“Even pre-pandemic, we were defensive in how we thought about GPs and how they would be positioned in some kind of adjustment,” he said. The firm aims to have a broad portfolio of buyout, credit, real estate and infrastructure GPs through its Strategic Capital portfolio.I'

Within this existing GP stakes portfolio, the firm feels that its special situations credit investment will perform well in the current environment. The same is true of its real estate and infrastructure investments, Maniscalco added. “We have not made any VC or growth investments yet, but that doesn’t mean we wouldn’t do in future,” he added.

According to Maniscalco, the “vast majority” of the GP stakes deals it makes are primary, with capital additions funded over time as needed for GP commitments, existing funds, new products, and bringing on teams. “It can be working capital or GP capital funded over two to three years, with a portion funded up front,” he said. “In secondary deals, we’re often buying out inactive partners, or where the general partners want to invest directly into their own funds so sell some of their own shares and reinvest on a personal basis.”

Alignment expectation
Given that GP stakes investors benefit from their investees having multiple fee streams, a further question of alignment can arise when it comes to GPs launching new strategies alongside their flagship funds. Critics of this development view the shift from GPs operating as straightforward investment houses to asset managers with caution. Misalignment with LPs can arise if new strategy launches are motivated more by the fees that they bring in than the overall development of the firms themselves.

Nevertheless, the inherent value of a GP and its brand is an important factor for Investcorp. “We would not advise a GP to do something that damages the core value of their business – we don’t want them to kill the ‘golden goose’ or the flagship strategy,” he said. “Sometimes we get asked, as a GP stakes investor, if we are pushing new products, but a GP raising products that are in line with that they do is healthy – for example, a monoline firm launching a mid-market or small-cap fund can slot its existing principles into a new products. If a firm doesn’t grow, that isn’t motivating for their teams, and a new strategy creates an opportunity for them.”

Maniscalco acknowledges that GP stakes strategies have not always been an easy sell. “Exit prospects and LP alignment have historically been the two areas of pushback for GP stakes,” he said. In spite of this, he argues that this perception is changing; Investcorp's LPs like the alignment that the GP stakes strategy offers and are getting more comfortable with the structure of these deals, he said.

GP stake deals can actually increase alignment, Maniscalco argues. “When our deals are done on a primary basis, the money goes back into their funds, so the shareholders become less exposed to just the management fees, and more exposed to the fund performance and carry,” he said. “So they become more aligned with their LPs, meaning that a deal like this is not a disincentive.”

Exits remain a question, with Maniscalco noting that “there is less of a liquid market for GP stakes than there is for something like a widget manufacturer.” However, the firm aims to keep its options open over the course of its investment period. “Our strategy is to keep optionality available: we work with these GPs for seven to 10 years, creating as much value as we can,” he said. “When we think about an exit, we work with them to see if there is a better owner than us, if we should pursue a control sale to a strategic, or if should they buy the stake back or even sell to a larger player. They can even list, like Petershill, or we could sell a portfolio in bulk to a public player. But the GP needs to be on board, as do our LPs.”

Looking ahead
As Investcorp plans future deployment from the GP stakes strategy, the firm is considering broadening its scope – including via the European market. “We spend a lot of time in Europe, and we will explore opportunities in Europe in the future,” Maniscalco said, adding that one of the nine GPs that the firm backed in its debut GP stakes fund is based in the UK, with another headquartered elsewhere but with a presence in London.

Although European deployment remains on the cards, the GP will tread carefully given the current macroeconomic situation on the continent and in the UK. “We will need a higher degree of diligence given some additional exposures like energy pricing, which might be more apparent in European GPs than US ones,” he said. “We also need to get our hands around the currency situation, thinking about how or if we would hedge this. You could argue that there is upside given how far the currency has gone one way, but we would have to do some work with bankers to protect our investment. In the medium term, Europe will be a very large market for us, but we may have to take a pause on deployment for now.”

Having raised one fund in the Strategic Capital series, Investcorp is aware of the kind of LPs to whom this strategy should appeal. “Sovereign wealth funds in the Gulf and US RIAs (registered investment advisers) are interesting targets for us to approach,” he told Unquote. “Pension funds will be harder to penetrate due to the denominator effect; and with UK pension funds, the gilts issue might see them take some commitments off the table for now. The re-up situation also impacts the whole environment. But we are fortunate that our existing investors have been less affected, which should be helpful to our GPs – we can help them get access to that market for their own fundraises.”

ESG will also continue to play a crucial role in the strategy’s development. In addition to Investcorp’s corporate ESG programme, the firm is placing the “S” at the forefront of its GP stakes investment strategy. The GP is working with US-headquartered specialised emerging manager firm Xponance on its XDO vehicle, which co-invests in stake investments with “diverse-owned” GPs and has a USD 300m hard-cap, according to media reports. Five out of nine of Investcorp’s current investments are “diverse-owned”, Maniscalco said. Xponance is headed by entrepreneur Tina Byles-Williams, who is the firm’s founder, CEO and CIO, and also sits on the board of Investcorp’s Strategic Capital Group.

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