Preface
DC Advisory’s GP Strategic Advisory Group specializes in advising alternative asset managers on a range of strategic transactions primarily at the GP / Management Company level. The team has expertise across a spectrum of strategic alternatives that range from non-dilutive, GP-level financings on one end to GP stake sales in the middle to M&A on the other end. The team has also advised on several NAV financings at the fund-level.
With that, I am pleased to share my recent conversation with Donato de Donato, Managing Director and Co-Head of DC Advisory’s GP Strategic Advisory Group.
What We Already Know
The market for GP stakes has grown rapidly over the past decade, as many GPs have sought capital for growth, GP commitments, succession planning, liquidity, etc.
As the market has matured and become more sophisticated, non-dilutive alternatives to GP stake sales have been developed to meet the varying and evolving objectives of GPs of all types and sizes
While these GP-level financing alternatives have not received as much media attention as GP stakes, many GPs are leveraging these structures to achieve a variety of strategic objectives, including funding GP commitments, raising growth capital, and even funding fee-paying LP commitments
Digging Deeper
What is a Non-Dilutive, GP-Level Financing?
GP-level financings are similar to GP stake sales in the sense that they are centered around the GP’s economics (management fees, carried interest and GP investments) and the proceeds from each can be used to achieve similar objectives.
From an economic standpoint, the key difference is that GP-level financings are non- dilutive in nature since they do not involve selling a perpetual stake in firm. Instead, the GP’s economics (typically, a subset of which) serve as “collateral” in a financing.
There are a variety of structural alternatives that exist in the market ranging from debt to preferred structures. These financings tend to be very customizable, and are typically structured through an SPV, allowing them to be non-recourse to the Management Company or individuals.
Growing Interest in Non-Dilutive Financing Alternatives
Over the past few years, DC Advisory’s GP Strategic Advisory Group has been spending an increasing amount of time working with clients on non-dilutive, GP-level financings to achieve a variety of strategic alternatives.
A few examples of the use cases of recent transactions completed by the DC Advisory team are as follows:
Funding of a large GP commitment (case study to follow)
Funding of a fee-paying LP commitment in the first closing of a fundraise
Balance sheet capital to seed a new, adjacent strategy
Balance sheet capital for the acquisition of another alternative asset manager
The team believes a big driver of this increased activity is the challenging market environment, as these financings can be used to help mitigate some of the pressures facing many alternative asset managers. Additionally, an influx of capital and new investors focused on the space has fueled innovation and competitive tension in the market.
Recent GP-Level Financing Case Study – New State Capital Partners
The DC Advisory team recently assisted New State Capital Partners, an operationally focused and value-oriented private equity firm focused on the lower-middle market, with its non-dilutive, GP-level financing to fund an outsized GP commitment (~10%) to its next flagship fund, Fund IV.
DC Advisory ran a competitive process that yielded several attractive proposals from a variety of investors. Ultimately, New State selected a party that provided them with the highest level of flexibility, allowing them to most efficiently utilize the facility to achieve their key objectives, namely to help fund the large GP investment while not diluting ownership or burdening the management company. In addition to providing the financing, the prevailing investor was one that could provide strategic value to New State over time as it continues to grow the franchise.
New State’s large GP commitment funded in this way, effectively gave the GP more money at work in the fund.
New State’s Perspective: Comments from the Managing Partner, Dave Blechman
As we planned for the Fund IV fundraise, we made the strategic decision to make a large GP commitment for two key reasons: (i) increase our team’s money-at-work in the fund, which was important given our highly selective deployment strategy and (ii) increase alignment with our LPs in a challenging fundraising environment.
This approach was positively received by our LPs and played an important role in our successful fundraise. In May, we closed on $700 million for Fund IV, which was oversubscribed, above its target, and raised in less than six months.
Donato and team have been thought partners of ours since we started New State in 2013. They helped us tremendously through this process and were instrumental in crafting a solution that achieved our key objectives.
Beyond the Office
Donato leads an active lifestyle. He’s an avid skier who loves hitting the Utah slopes with his sons, competes in triathlons, and has twice completed the New York City Marathon. A lifelong AC Milan fan, he won’t answer the phone during a match. And when it comes to the kitchen, his signature mushroom risotto is said to be second to none.
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