Preface
Drew Nordlicht is a Managing Partner of Crest Capital Advisors, a multi-family office for general partners of private asset management firms. In addition to running Crest, Drew serves on the Board of Directors of the Hightower Trust Company, while Crest’s co-founder, Dave Molnar, serves on Hightower’s Private Markets Committee.
With a focus on optimizing GP liquidity, tax and estate strategy, Crest Capital supports a growing group of Private Equity, Credit, Real Estate and Hedge Fund partners on complex financial matters pertaining to the GP’s personal balance sheets and multigenerational strategy. Built and operated like a single family office, Crest’s platform serves GP families of varying ages and liquid net worth ranges, and the team is designed to solve the strategic and administrative complexities unique to general partners of asset management firms.
What We Already Know
GP Stakes investments are designed to provide founding Partners liquidity in the form of (a) Secondary liquidity distributed to the partner(s) personally, or (b) in the form of Primary capital (balance sheet) to augment the GP’s growth across future fund capital commitments and the firm
While GP stake buyers are in the trade for long-term capital appreciation and distributable income, GP stake sellers sell to achieve personal liquidity and career objectives, and little information is shared publicly around how GPs are personally navigating stakes sales
GP Stakes deals are complex in nature with downstream tax and personal estate implications, and most GPs leverage their firm’s CFO or in-house personnel to juggle the various personal interests involved, a dynamic that Crest Capital exists to optimize
Digging Deeper
Personal Considerations: Primary vs. Secondary
As the GP Stakes and GP financing ecosystem continues to proliferate, private asset managers are increasingly looking for strategic capital to power their future commits, take chips off the table, or both. The majority of selling GPs have an initial bias for taking liquidity in the form of a Secondary sale over selling a stake and retaining the proceeds on the firm’s balance sheet (Primary). As a Family Office and fiduciary, Crest approaches each GP family’s personal balance sheet as if it were a corporate entity. Crest’s experience performing this personal analysis includes both Primary and Secondary deals – and while the rationale behind Secondary sales is apparent (liquidity and diversification), Crest has developed the “Pros of Primary” that each GP should consider when evaluating a stakes deal for themselves personally:
Pre-Tax Capital Efficiency: Leaving capital on the firm’s balance sheet allows for tax-deferred investment of the full proceeds from a stakes sale, whereas electing to take proceeds or “Secondary” subjects the partners to personal taxation prior to the reinvestment of capital into personal investments
Controlling the Capital: GPs that elect Secondary proceeds lose both the ability to control the timing of future distributions and the ability to invest that capital from the firm’s balance sheet in the future, leading to the next point
Tax-Advantaged Balance Sheet Investing: GPs may have the ability to invest tax-efficiently from the balance sheet of their firms, a strategy Crest Capital explores for clients looking to generate additional tax-advantaged income following a stakes sale
Optimal Estate Planning Attributes: Primary stakes proceeds, often considered amortizable goodwill on the firm’s balance sheets, are owned by the GP corporate entity. Primary stakes proceeds lack marketability and control, may not require retitling for placement into trust entities, and may be easily transferred in partial interests, making them a strong tool for GPs looking to tax-efficiently unlock multi-generational wealth
Availability of GP Financing: The industry is experiencing a large increase in GP and NAV financing supply, which Crest believes is a tailwind in supplementing GP liquidity
Stakes Deal Diligence Only Begins With The GP’s Fund-Level Documents
While most GPs enter a stakes transaction squarely focused on the immediate impact within the walls of their firm, Nordlicht suggests that “deal risks” can exist beyond the firm. As a family office platform, Crest engages each relevant party on behalf of its GP families. This group includes: The GP’s firm-level finance department, firm-level accountancy, the GP’s personal tax advisor, the GP’s personal estate counsel. Upon selling a stake, Crest engages in a review process of the entire set of deal documents to ensure the transaction is in sync with all legal and tax reporting. In the absence of thorough deal document diligence, it is possible that stakes proceeds will be delivered to the wrong parties or entities, potentially creating tax-reporting issues that can result in the costly legal process of unwinding and reconciling discrepancies.
Modeling GP Stakes Across The Personal Balance Sheet
GP Stakes transactions have multi-year implications to partners’ liquidity and often result in the reapportionment of an individual partner’s exposure to each GP revenue stream, both for in-the-ground funds as well as future vintages. Having advised families across stakes transactions and consequently acquired buy-side data in the process, the Crest Capital team has developed internal modeling capabilities to evaluate the flow-through impact of GP economic transactions across the personal balance sheet.
While Crest holds what they coin their “GP EquityInsight” model internally, the team suggests that there must be a comprehensive understanding of the following to properly model and advise clients ahead of stakes sale:
Complete personal balance sheet visibility to evaluate and forecast estate liability pre-transaction
Effective tax rates across estate entity types (income and estate)
Current and post-transaction economic share (%) across the GP, carry, and future funds
Timing of in-the-ground fund realizations and future formation(s)
Expected return profile of each fund, both present and future
Crest’s GP EquityInsight Model leverages the above inputs and industry-standard underwriting assumptions to evaluate clients’ GP economics on an NPV basis across the personal balance sheet. Crest is committed to equipping its families with differentiated tools to evaluate the impact that firm-level transactions have on their multi-generational strategy.
Beyond the Office
We always enjoy learning what members of the GP Stakes community are passionate about outside of work. Drew enjoys supporting his girls, Danica and Haley, through their athletic endeavors as they both pursue competitive volleyball careers.
To reach Crest Capital’s GP Services Team, email: [email protected] with “[GP Stakes News]" in the subject.
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