When raising GP capital, private equity partners are increasingly considering a multitude of financing solutions beyond a traditional stake sale. Certain capital needs may be finite in nature and not necessarily appropriate for a permanent financing solution, so aligning duration with the timing of those needs has become a point of focus. Furthermore, suffering dilution ahead of a successful fundraising or within a growing multi-strategy platform can be costly as it may not fully capture the value created by the future growth of the firm, particularly when proceeds from the capital raise are being re-invested into the GP and spurring further growth. As a result, GPs are increasingly putting in place structured solutions in the form of non-dilutive preferred equity.

Raising preferred equity can allow GPs to accomplish many of the same strategic objectives of a stake sale:

The use of proceeds from the preferred financing is entirely flexible and the GP will often service a variety of needs in a single transaction. The quantum of financing will be governed by the amount of equity value the GP has accumulated in their existing funds. These equity interests primarily take the form of GP co-investments but carried interest and fee streams can also be used to create additional capacity.

At Pemberton, we manage a global GP Solutions strategy, anchored by ADIA, out of which we can write checks up to $600 million through our non-dilutive, preferred equity structures. These structures allow GPs to contribute a portion of their equity interests in existing funds to an SPV, into which Pemberton invests up to 75% of the NAV of those interests in the form of preferred equity. Realizations from the contributed equity interests are first applied to the preferred until it meets its preferred return, after which point 100% of the remaining cash flows are distributed back to the GP.

Unlike a stake sale whose value will be most meaningfully influenced by what portion of future fee streams the GP is willing to include, Pemberton’s GP Solutions do not require any fee streams to be contributed to our structures. This gives GPs maximum flexibility and autonomy to manage their business going forward, while removing the need to “time the next fund raise”, and ultimately resulting in greater alignment with a longer-term view on partnership. Our desire is to finance multiple transactions for our GP partners over time and give them exposure to our active LP base that includes some of the largest Middle Eastern sovereign wealth funds and leading European insurers and pension houses.

Each situation is unique and our GP Solutions’ capital is designed to be flexible and to align with the timing of the GP’s future realizations and commitments. Under the right circumstances, the structure can allow for leakage back to the GP, delayed draws to finance future capital calls, as well as recycling provisions to create additional flexibility. A common use of proceeds is to fund future GP co-investments in newly raised funds, which in turn are held within the SPV and further expand the capacity of the facility over time.

A preferred financing can be raised with relative ease and in a matter of weeks as compared to a GP stake sale which will typically take months to negotiate and close. Unlike a stake sale, raising preferred does not require regulatory approval, and as the financing is entirely supported by GP assets, LP involvement is also unnecessary.

An obvious time for a GP to consider a preferred financing is ahead of launching their next major fundraising. The preferred structure can provide GPs with meaningful leverage (typically 2 to 1, but sometimes as high as 3 to 1) to fund their GP commitments into their next funds. A meaningful increase in their commitments demonstrates conviction and reinforces alignment with their LPs, while also capturing additional upside. At Pemberton, we also have the ability to structure and fund a new LP commitment, which can help fill out fundraising in a challenging environment.

Compared to a GP stake sale, raising a preferred can provide better duration alignment with finite and predictable capital needs, fueling additional growth and value for the GP at a lower cost. Preferred instruments can also be used in tandem with a stake sale to create additional capacity and minimize dilution. The question is no longer simply whether to sell a stake, but which capital structure best aligns with the GP’s strategic timeline, growth trajectory, and long-term vision for their firm.

The views expressed in this article are those of Pemberton’s GP Solutions team and reflect opinion as at the date of publication. This material is provided for informational purposes only and does not constitute investment advice, a recommendation or an offer to buy or sell any security or investment strategy.