“When will we see liquidity?” and “How do we establish a credible mark absent a monetization event?” have become recurring questions from limited partners in GP stake funds. As portfolios mature and permanent capital structures proliferate, investors are increasingly pressing GP stake sponsors (“Stake Sponsors”) to demonstrate not only long-term value creation, but a credible pathway to liquidity and third-party validation for their investments in asset managers (“Partner Managers”).

With the maturation of the GP stakes market and increased diversification of product offerings in recent years, this pressure for capital liquidity has become central for Stake Sponsors when raising new fund vintages and cementing their track record.

The traditional exit playbook for GP stakes - change-of-control transactions, IPOs, and secondary transfers - has proven episodic and difficult to underwrite. As a result, security design is emerging as a central lever for managing portfolio liquidity, bridging valuation gaps, and supporting capital formation.

Stake Sponsors have historically relied on four main avenues for liquidity:

However, these existing liquidity avenues have been plagued by inherent limitations that constrain their reliability for Stake Sponsors. Change-of-control transactions are irregular and unpredictable and, as a result, are not well positioned for underwriting investment returns or providing LPs with a target liquidity profile.

Portfolio IPOs and other publicly listed GP stake vehicles have struggled to trade at full value due to limits on the ability to disclose Partner Manager performance and fundraising events, the complexity of GP stake products, and Investment Company Act constraints in the United States.

While portfolio sales are well positioned to facilitate seed investment exits and the sale of smaller stakes, they are generally not well suited for the sale of multiple large positions.

Finally, despite increased activity in the secondary market for GP stake transactions, significant depth has yet to emerge in the market. We are optimistic that as the number of participants in the GP stakes market grows and the fund secondaries market continues its rapid expansion, the secondary market for GP stakes will similarly evolve in the coming years.

In particular, strip sales and other sponsor-led structures which provide partial liquidity are emerging as an important near-term step towards fostering greater liquidity within the GP stakes market and potential for strips and other securitized products to trade more freely over time.

In response to these issues, some Stake Sponsors have begun adopting evergreen fund structures used in other long-dated asset classes, such as redemption rights and continuation fund vehicles. However, the efficacy of an evergreen fund structure is limited by the quality of the Stake Sponsor's valuations of their Partner Managers.

Part of the challenge is that asset management firms do not follow the same linear path of successive financing rounds followed by a public market exit as other growth-oriented businesses, nor are asset management firms highly capital intensive or acquisitive in a way which necessitates successive financings. To this end, it is not uncommon for highly successful asset management firms to grow and scale on a purely organic basis, reducing the frequency of natural third-party pricing events.

In response to these market dynamics, we have seen increased appetite among Stake Sponsors to explore capital liquidity mechanisms embedded in their GP stake security that are designed to provide full or partial capital liquidity and/or facilitate a third-party mark of an existing position.

While each solution is highly bespoke and contingent on the dynamic between the buyer and the Partner Managers, several themes have started to emerge:

While GP stake investments have historically been viewed as permanent equity, with shorter-term investments typically structured as preferred equity and allocated out of a separate preferred equity fund, both buyers and sellers are increasingly seeing value in the inclusion of contractual put/call mechanisms.

These put/call rights are typically triggered based on the fair market value of the Partner Manager as determined by mutual agreement of the parties or a pre-determined valuation dispute resolution framework and are exercisable only following the expiration of a negotiated lock-up period and/or the attainment of objective performance milestones.

Partner Managers may regard a call mechanism as a favorable deal term which mitigates concerns regarding the sale of permanent equity in their business and risks associated with deterioration of the relationship with the Stake Sponsor (which may arise as a result of team departures or changes in institutional strategy).

From the Stake Sponsor's perspective, the inclusion of a put right provides a favorable marketing feature when fundraising and increased control over exit timelines and portfolio return structure.

When structuring a put right, it is imperative that Stake Sponsors consider the means by which the Partner Manager may finance the exercise of the put or call option, so as to avoid a liquidity crunch.

These concerns can be mitigated by providing the Partner Manager with access to capital from other debt or preferred equity funds of the Stake Sponsor or by converting the existing stake into a preferred equity instrument with a redemption feature.

Similar to a negotiated put/call right, Stake Sponsors can negotiate either a formal management buy-back right or signal a willingness to engage in such discussions through a contractual agreement-to-agree provision.

We have also found the availability of a buy-back to be a useful tool for bridging valuation gaps with high-growth Partner Managers and addressing choice-of-security issues where a stake is being used to support intergenerational succession planning.

In our experience, the inclusion of a buy-back right (even where non-binding and contingent on further negotiations) can serve an important role in facilitating future discussions and encouraging Partner Managers to propose a buy-back or similar redemption mechanic.

Additionally, for multi-product Stake Sponsors, providing the Partner Manager access to more senior capital products can increase willingness to pursue a buy-back.

Securitizations and rated feeder structures have become increasingly popular tools for Stake Sponsors seeking to access capital from a broader range of limited partners on a capital-efficient basis.

An added benefit of the creation of rated feeders and collateralized fund structures is that due to the requirement for an established portfolio of investments for rating and securitization purposes, the formation, offering and investment process for such security or rated feeder provides an early stage valuation of the fund's assets and validation of such marks from investors in the product.

More importantly, the capital provided by these investors provides a near term return of capital for early fund investors, which can then be redeployed into future products.

Drawing upon structuring techniques used in seed investments and other asset classes, the equity represented GP stake can be subject to rebalancing or conversion (or a gross fee entitlement converted into a net interest) following satisfaction of time- or event-driven milestones.

In doing so, the Stake Sponsor and the Partner Manager establish a new valuation upon the completion of the rebalancing or conversion.

This may also be a powerful tool for bridging valuation mismatches at the time of initial investment. For example, a Stake Sponsor may accept the Partner Manager's projections and underwrite an investment based more closely on the Partner Manager's model if ownership adjusts to reflect actual performance at a later date (which may range from one year post closing to over five years post closing).

Such a revaluation can be structured on a cashless basis, including through issuance of a preferred equity security or reallocation of interests to account for any overpayments at closing.

Alternatively, inspired by structuring seen in connection with preferred equity investments, Stake Sponsors can structure common equity investment ownership percentages to sunset over time and/or based on the satisfaction of return thresholds in a manner designed provides the Stake Sponsor a targeted blended ownership exposure over time and performance scenarios. This may be further bifurcated such that a right to current net fee related earnings steps down over time to provide Partner Manager investment professionals with increased exposure to current income will providing the Stake Sponsor with residual upside in the event of a monetization transaction.

Due to fund capital constraints, it is increasingly common for Stake Sponsors to limit the total amount of capital required to be contributed to a Partner Manager in respect of future fund capital commitments.

An incidental consequence of these caps may be to incentivize Partner Managers to solicit additional primary capital to support growing fund capital commitment obligations.

Such a primary capital investment can create both opportunity and structural incentive for revaluation of the Partner Manager, providing a fresh mark for the Stake Sponsor. In addition, to the extent that the primary is being provided by a new third-party, such an investment may also provide an opportunity for the incumbent Stake Sponsor to sell a portion of its interest to the new buyer so as to permit the investment to be made on sufficient scale, thereby providing enhanced capital liquidity to the incumbent Stake Sponsor.

Finally, and perhaps most controversially, an investment may be structured to require that the Partner Manager procure liquidity for the Stake Sponsor after a specified period of time.

This liquidity right may begin as a put at fair market value and, failing repurchase, escalate into a right to force a marketed sale of the Partner Manager as a going concern.

While this structure is a feature in other minority investment strategies, it is not typical in the GP stakes context, due to potential disruption, reputational considerations and LP implications.

As a practical matter, the mere presence of such a mechanism may influence behavior well before invocation. However, Stake Sponsors must weigh theoretical liquidity benefits against reputational cost, franchise impact, and signaling risk within a relationship-driven ecosystem.

The themes discussed above are not intended to be a dispositive list of all possible avenues for facilitating capital liquidity.

The GP stakes market is at a critical inflection point. While many early GP stake investments have been realized, an increasingly large portion of portfolios does not present near-term liquidity prospects. However, going forward, we expect that security structure will play a growing role in how Stake Sponsors manage portfolio level liquidity and serve as an important solution for showing LPs a clear and established path for monetizing and valuing their investments.