When funds become firms: Our partnership with Cantilever Group, a GP stakes firm
How GP staking is emblematic of the evolution of the business of alternative asset management
If you take a 15-minute stroll from Park Avenue and 42nd and head up towards 57th and 5th on the way to Central Park, chances are you’ll walk by Blackstone’s office. You’ll start near Carlyle’s office in New York at 1 Vanderbilt, you’ll pass Blackstone’s 345 Park Ave office, and you’ll end up at Apollo’s office at 9 West 57th. In between, you’ll walk by the offices of an array of alternative asset managers that are home to hundreds of billions of dollars in managed capital.
These firms may have ended up here, but they sure didn’t start here. Private markets’ largest firm, Blackstone, the first firm to cross the $1T AUM threshold, started with just $400,000 in 1985. A mere 39 years later, they stand tall amongst a sea of titans that collectively own many of the world’s most recognizable brands.
Today, Blackstone stands at ~$151B in market cap after recently entering the vaunted gates of the S&P 500, smaller than JP Morgan ($567B market cap) but larger than Goldman Sachs (~$148B market cap).
Just a few blocks up from Blackstone at 9 West 57th sits a firm that has grown its revenue faster than the world’s largest tech companies over the past 15 years.
Apollo CEO Marc Rowan’s remarks on Apollo’s recent earnings call offer an illuminating window into just how astounding their growth has been.
We've just come back from our Partners Retreat, where all 201 Apollo partners get together and we discuss the outlook. And I began those remarks by anchoring people in history. In 2008, we were $44 billion of AUM. If you fast forward, we've grown 14 times; that's faster than Apple's revenue, that's faster than Microsoft's revenue, that's faster than semiconductors. Truly extraordinary [author emphasis].
Heading back down to 52nd Street, the world’s largest asset manager, BlackRock, made a move that highlights their desire to focus on private markets and illustrates that alternative asset managers can continue to grow in value.
Recently, the industry bore witness to a “transformational” transaction, as Dan Forman of Jefferies described BlackRock’s $12.5B purchase of $100B AUM Global Infrastructure Partners. This acquisition is another clear example of the validation of alternative asset managers as businesses following the increasing number of private equity firms that have gone public and have been well-received by the markets.
From funds to firms
BlackRock’s $12.5B acquisition of Global Infrastructure Partners illustrates that funds can turn into firms. And quite valuable firms indeed.
As private markets continue to mature, we are witnessing the evolution of alternative asset managers as businesses.
The expansion of single-threaded firms that grow into multi-strategy private markets investment platforms has been a defining feature of the past decade of private markets.
The theme of funds turning into multi-strategy firms is driving a host of features that are at the heart of mainstreaming private markets and an integral component of shaping the business evolution of alternative asset managers:
The currency of consolidation
Alternative asset managers seeking to expand their firms in terms of AUM, LP type, or investment strategy are on the hunt for solutions to enable them to grow their platform. Acquisitions are one way to advance these ambitions.
As the below chart by EY illustrates, the industry has seen an uptick in acquisitions by the top 50 alternative asset managers. 2021 and 2022 reflected significant increases in the number of acquisitions by top alternative asset managers. Recent acquisitions were punctuated by BlackRock’s $12.5B acquisition of GIP, TPG’s $3.1B acquisition of Angelo Gordon, and General Atlantic’s acquisition of Actis.
This datapoint is far from surprising. The big are getting bigger, which further augments their valuation and grows their LP base, investment strategies, and product capabilities.
Becoming a multi-strategy manager also does wonders for an alternative asset manager’s valuation multiple. Multi-strategy managers command a much richer multiple than single-strategy managers.
Consolidation led by the top end of the alternative asset manager landscape should also have the follow-on effect of making the middle market alternative asset management landscape more valuable.
Wealth is a winning strategy
While the $135T of institutional investor AUM globally has historically had access to alternatives, the $145T of global individual investor AUM has not. That has begun to change over the past decade due to a combination of forces at work: technological innovation, regulatory changes, education of the wealth channel, and GPs investing into infrastructure and salesforces to work with wealth.
Much of the wealth channel is woefully under allocated to private markets, with even much of the HNW channel having a sub 5% allocation to private markets. This data point means that the majority of the $145T of individual investor AUM has not yet materially allocated to alternatives, as a February 2023 Bain & Company report illustrates.
As more alternative asset managers turn into one-stop-shops for LPs through both acquisition and productization for the wealth channel, we’ll start to see more capital from the wealth channel flow into private markets.
Many alternative asset managers recognize the importance of properly educating, engaging, and partnering with the wealth channel. Given its size and scale, the wealth channel is the new institutional LP.
One-stop-shops in the alts supermarket
The focus on the wealth channel, and the trend of LPs consolidating their LP relationships, is driving another business evolution: the focus on becoming a one-stop-shop alts manager.
There are now more options than ever for investors who want to go shopping in the alternatives supermarket. But the largest alternative asset managers know that cross-selling LPs on different products can create an even stickier relationship and can increase share of wallet.
Alternative asset managers are increasingly viewing their sales strategy as akin to an enterprise software sale. With that framework in mind, GPs are — and should be — treating their LP relationships as long-term, recurring enterprise sales that should renew if the funds deliver on investment performance.
One-stop shop solutions will continue to feature as private markets continue to evolve. As larger platforms look to grow their offerings to further expand LP relationships and total dollars allocated (as Ares, amongst others, have done quite successfully), the trickle-down effect will mean both consolidation of middle-market specialist managers and middle-market managers looking to replicate the one-stop-shop strategy but at a smaller scale.
The barbell effect
In a world where the larger platforms evolve into one-stop shops, the other end of the barbell will be occupied by smaller specialist managers. The specialist managers that outperform will be afforded the opportunity to grow their business (read: AUM) due to strong investment returns.
Return dispersion is greatest in the hardest to access and hardest to underwrite categories. The difference in performance is particularly pronounced in venture capital, growth, and lower middle market private equity.
A chart below from Natixis, utilizing Adams Street Partners data from 2019, highlights return dispersion in private equity.
A focus on smaller, specialist managers and strategies where it’s difficult to unearth and access managers should also give rise to adjacent asset management categories, such as fund of funds and OCIO businesses. These businesses have the opportunity to scale AUM as more capital and additional entrants come into private markets.
OCIO services happen to be growing at a rapid pace, according to a 2022 report by Chestnut Advisory Group.
In 2022, Chestnut predicted that global OCIO AUA would reach $4.15T AUA by 2026, an 11% CAGR. Asset and wealth management research firm Cerulli observed a similar trend, albeit predicting roughly half the annual growth rate as Chestnut (5.6%) to $3T AUA by 2026.
The OCIO business should begin to feature more prominently in private markets as both smaller institutions and wealth management platforms look for customization and differentiation in their alternative allocations.
The distribution of talent
As big firms get bigger, they understand the need to institutionalize their capital raising efforts.
Working with the wealth channel, and financial advisors in particular, is very much an enterprise sale (which both Bain & Company and I have written about). The process of breaking down prospective LPs into large, medium, and small-sized enterprise customers across institutional investors, privates banks, large wealth platforms and aggregators, smaller wealth advisors, family offices, and individual investors is critical for an alternative asset manager to understand where they have optimal product-market-fit.
This sales process and channel segmentation strategy is not terribly dissimilar from a B2B software company determining their customer channels, categorizing those customers, and devising the correct sales organization to successfully work with each customer category.
The largest alternative asset managers have invested in sales and distribution teams purpose-built to cover the wealth channel, much like enterprise software companies build out and staff out salesforces to cover enterprise, middle market, and SMB customers.
Blackstone, which has grown its wealth distribution team to over 300 professionals, up from virtually zero eleven years ago, is a prime example. The result? Almost $250B of its $1T in AUM now comes from the wealth channel.
Other firms are following suit. The industry is witnessing the larger private firms focus on hiring experienced talent to devise strategies to engage with the wealth channel. General Atlantic’s recent hire of Chris Kojima, former Goldman Sachs Partner who co-led the global client franchise and capital markets activities for $2.7T AUM Goldman Sachs Asset Management, to be their Global Head of Capital Solutions.
Certainly, the largest firms and those committed to scaling into one-stop-shop alternative asset management firms for clients can invest the time, capital, and resources into building large distribution teams to engage with the wealth channel. But what about the smaller firms? They will need solutions that support their growth as well, it will just look different than how Blackstone and its peers have done so.
Proven in public markets
When Blackstone went public in 2007, many questioned how the public markets would value alternative asset managers’ business models.
How would investors look at management fees? How would an investor value carry, which is a highly variable, unpredictable and long-dated income stream?
17 years later, the weighing machine of markets have spoken.
Blackstone has close to a $145B market cap. Just a handful of publicly traded alternative asset managers alone represent over $560B of market cap, as the below AGM Index that tracks certain publicly traded alternative asset managers illustrates.
The public markets have proven that investors see value in the durable customer relationships and high-quality recurring revenue that alternative asset managers generate. There’s real scale and operating leverage with these types of businesses. Relative to the increase in AUM, the primary variable expense is headcount. That feature favors alternative asset managers, as the economies of scale are tremendous for firms that can grow AUM. Operating margins on management fees alone can be upwards 60%, along with low fixed expenses.
Investor interest in alternative asset managers has only continued to grow as AUM has flowed into private markets in spades.
Private markets AUM has grown almost 3x since 2008. PitchBook expects private markets AUM in closed-end funds to reach at least $20T, if not closer to $24T, by 2028.
What would another $5-10T of AUM do to the enterprise values of alternative asset managers? It could double or even triple firms’ AUM over a span of the next five years and would result in marked increases in enterprise value that accrues to the management companies of these firms.
Owning the growth of an industry
What once started as a kernel of an idea at Lehman Brothers to invest into the management companies of hedge funds became part of Neuberger Berman in 2011. That strategy proved relatively successful, according to Michael Rees, the person behind Lehman’s strategy of investing into hedge funds: “A dollar went into the ground; by year three or four, you already had $1.50,” Rees told Ted Seides on a Capital Allocators podcast.
That business is now known as Blue Owl Capital’s $55B AUM (and over $31B invested) GP Strategic Capital. Michael Rees and Sean Ward have since built a business, and trailblazed an industry, focused on investing into alternative asset managers and providing them with the capital to grow.
This investment strategy is best known as GP stakes. It blends the best of elements of private credit, private equity, and, to some extent, secondaries.
By investing into the management companies of alternative asset managers, GP stakes investors benefit from the durable, steady cashflows that come from the booked revenues of management fees, which are often 1.5-2.0% of AUM. Once commitments from LPs are secured, it’s highly likely that LPs will be paying an annual management fee for between seven to ten years based on the strategy and life of the fund. These return streams reduce the J-curve for GP stakes investors in comparison to a traditional private equity investment.
By owning a part of the management companies, GP stakes funds are also beneficiaries of the carried interest that private equity firms generate. Those are more long-dated return streams, and can be quite variable, but they can also be quite large if the firm’s investments perform well.
The third element of GP stakes investing provides an additional upside kicker — one that is becoming increasingly more common as the alternative asset management industry undergoes its moment of consolidation. Through minority ownership of these alternative asset managers, GP stakes funds can generate additional returns when these firms are either acquired or go public. Some recent examples of this include CVC’s recent IPO, which now values the firm at over $19B, BlackRock’s acquisition of GIP for over $12.5B, and Franklin Templeton’s acquisition of Lexington Partners for over $1.75B. Continued consolidation is expected as alternative asset managers look to expand their capabilities and as traditional asset managers look to offset challenges in their long-only business.
Far from stuck in the middle
While Blue Owl has grown its business over the past thirteen years to become a market leader at the top end of the market, now representing 60% of all capital ever raised for GP stakes, according to Blue Owl Co-President Michael Rees, it’s the middle market that represents an untapped opportunity.
The majority of capital raised for GP stakes investing has gone into large cap alternative asset managers. Cantilever Group estimates that almost 35% of the GPs at $8B AUM and above have sold a stake.
The number of firms between $500M and $8B AUM that have sold GP stakes pales in comparison to the upper end of the market, with only 3.6% of GPs in the middle market having sold stakes (PitchBook).
Blue Owl’s Rees said recently in a PEI report on GP stakes that the industry is in its early innings of growth:
“The private markets are just scratching the surface in GP stakes. We believe the overall industry will double in size in the next five years, creating great potential growth for GP stakes strategies.”
Alternative asset managers seem to share this belief. A 2023 survey by Dechert finds that 59% of private equity firms plan to sell a stake in their GP within the next 24 months.
Access to the secular growth trend of private markets
At Broadhaven, we’ve seen this opportunity persist from a number of different vantage points:
Our financial services focused investment bank, Broadhaven Capital Partners, advised Franklin Templeton on its $1.75B acquisition of leading secondaries fund Lexington Partners and Angelo Gordon on its $3.1B sale to TPG. Both traditional and alternative asset managers are looking to grow — and they will acquire to do so.
Our Partner at Broadhaven Capital Partners and Co-Founder of Cantilever, Todd Owens, sharing his experience gained from 25 years advising and working with alternative asset managers as a Partner at Goldman Sachs. Todd has seen the evolution of the industry and deeply understands the business of asset management.
My experience as an early, pre-product employee at iCapital helping to build the wealth channel distribution network gave me an inside perspective on the desire for many alternative asset managers to expand their LP customer base to the new institutional LP: the wealth channel.
My conversations with over 100 guests on the Alt Goes Mainstream podcast and 52 editions of the AGM Weekly newsletter, where week after week, the biggest firms in private markets and wealth management discuss the growing relationships between alternatives and wealth as investing enters a new world order.
As alternative asset management as an industry matures and as the wealth channel begins to invest into private markets, GP stakes investing appears to be a way for investors to gain access to both the secular trend of growth in private markets and gain exposure to a diversified set of strategies and managers.
We are certainly excited about this space and it’s an area in which we are investing for a number of reasons.
So, why do we like GP stakes investments?
“The best business model in finance”
Former Blackstone and Airbnb CFO and WestCap Founder and Managing Partner Laurence Tosi said on a recent Alt Goes Mainstream podcast that alternative asset managers are “the best business model in finance.”
When one breaks down the business of an alternative asset manager, it’s hard to argue with L.T. It also makes GP stakes investing one of the more attractive forms of investing in private markets.
On our podcast, I asked L.T. about how alternative asset managers can balance scale with returns. His answer was fascinating.
Michael: That brings up such a fascinating point. I think it was Steve Schwarzman who said, scale is our niche. And that's such an interesting comment when you think about investing because when I think about that, I think about how do you balance the equilibrium of scale, as many of these firms like Blackstone and others are building, and the value that's created from that liquidity, like you say, with returns. And that's the other side of that for the investors and the other side of that marketplace, and generally, returns can be harder to come by the more scale you have. Because as more capital comes into a space, it gets harder to generate returns. How do you think about scale in the context of alternative asset managers and what's happening in private markets? And then how you balance that with returns while thinking about just the building of these marketplace businesses?
L.T.: I remember when Steve said that. That scale is niche. I'm going to add a second part, Michael, to that statement, which I guess gets less covered than he would say. He would also say that scale begets skill. And the more skill you can put against creating value, the more you can justify the scale [author emphasis]. So in the early days of Blackstone, shortly after we went public, there was a lot of confusion about, well, how's this different from The '40 Act shops that do mutual funds, et cetera. And the answer was we found businesses where skill really matters, i.e., finding businesses and knowing how to turn them around. And then we found a little bit of the golden rule that the more scale that we had, the more resources we would have at Blackstone to invest in creating alpha, if you want to call it that, or value creation. And so the scale actually made us more competitive. So, if I think back to when I joined the firm, I think our private equity fund was six billion, and our real estate fund was probably three billion. Those are about now both 30. That difference in those is not just adding more assets like you would to a mutual fund or a hedge fund. Those assets have translated to deep operating teams, asset management teams that can actually help create value during the course of the whole [author emphasis]. Also, going out and finding more deals, negotiating them. The golden rule in investing is where can you find a space that the more you invest in your returns, the greater the alpha you generate was. That's the right place to scale [author emphasis]. If you don't have that, then scale doesn't create what Steve said. It’s not your niche and doesn't create value. So that was the guiding force behind how that was built out.
“Scale begets skill. And the more skill you can put against creating value, the more you can justify the scale,” L.T. said. What an interesting way to look at the value of scale. Scale can create both the liquidity and network effects — in certain investment strategies — that provide the edge that’s much more difficult to attain without the scale.
Better than SaaS
The long-term, recurring revenues from management fees and ability to scale management fees over multiple funds with generally sticky, recurring enterprise customers represent an attractive investment for those that own the fund’s management company.
There is merit to the argument that contracted management fees represent an even more compelling revenue stream than a business model that investors have favored: Software-as-a-Service (“SaaS”) revenues.
With contractual commitments from customers to pay a management fee annually over the life of a fund, virtually guaranteed revenues over a seven-to-ten-year period are even more attractive than SaaS revenues, where customers generally come up for renewal annually to every few years. Yes, fund managers are also fighting for LP re-ups into new funds every two-to-three-year fundraising cycle (or sooner, if they have different strategies), but with many firms evolving into multi-strategy platforms and one-stop-shops for allocators, growing LP wallet share appears to be the trend.
In addition to the steady and recurring revenues from management fees, investing into the fund’s management company also offers upside from the carried interest, providing an additional kicker for returns over the long-term.
Shades of private credit, private equity, and secondaries
GP stakes, in effect, offer investors a combination of characteristics of private credit, private equity, and secondaries wrapped into a single strategy.
Cash yields from revenue sharing on the GPs’ contractual management fees and / or earnings, often resulting in a reduced J-curve and a faster path to distributions, have characteristics of private credit.
Exposure to a GP’s carried interest offers private equity-like upside, as does exposure to the growth in returns from the GP’s capital commitment. And, with consolidation amongst alternatives managers an increasingly popular trend, there’s possible private equity-like upside from a potential exit.
Add in diversification across strategies and vintages across a portfolio of GPs and GP stakes funds have shades of secondaries strategies.
Characteristics of a GP stakes investment
Cashflow and reduced J-curve: Investors in alternative asset managers can benefit from high cashflow distributions related to contractual management fees. As Blue Owl’s Rees said in PEI’s GP Stakes Report, “these strategies typically don’t have J-curves and can begin paying out cashflow literally the quarter after their final close.”
Upside from exposure to carried interest: Investment performance can drive meaningful additional revenue over the long-term for owners of alternative asset managers.
Diversified access to different strategies: A portfolio of GP stakes investments offers exposure and diversification across a number of private markets strategies.
Compounding growth: As firms grow their AUM, their revenue has the ability to compound, which can lead to increasing cashflow streams. More capital is flowing into private markets, so compounding AUM growth should occur for managers that have attractive investment strategies, strong track records, and the ability to sell into various LP channels.
Strong operating margins: Alternative asset managers have strong operating margins, often upwards of a 60% EBITDA margin. This feature can scale, as the largest expense for many firms is headcount. As AI becomes a tool that can drive business efficiency pre- and post-investment for alternative asset managers, it’s possible that there’s even more to be operating profit margin to extract.
Sticky, repeat LP relationships: LPs are often sticky and repeat customers. Many of the larger, multi-strategy firms are able to further penetrate LP wallet share by their ability to cross-sell LPs allocations to multiple fund vintages and strategies. The LTV of an LP only increases as firms are able to partner with LPs on more investments.
Clear playbook for growth and growth drivers in the business: There is a clear playbook for growth for alternative asset managers. As firms grow larger, they have the ability to either build or buy different strategies that grow AUM, often resulting in both more fee-related earnings and increased enterprise value, both of which benefit GP stakes investors.
Cantilevers for helping asset managers construct their foundation
All of these industry trends and business model dynamics of alternative asset managers is why we are excited to announce our partnership as minority owners and investors in Cantilever Group, an independent investment firm specializing in providing flexible capital solutions to leading middle market asset managers via debt, preferred equity, and common equity investments.
Finance industry veterans Todd Owens and David Ballard saw this gap and decided to found Cantilever Group to provide solutions to middle market asset managers that have between $50M and $500M of enterprise value.
Cantilever represents the type of business in private markets that we believe is set up for success and we are excited to help Todd and David build Cantilever as minority owners. Cantilever, which has already made two investments, is led by industry veterans who are deeply knowledgeable and have experience working with many of the largest firms in the alternatives space, in addition to a partnership with strategic investor in BTG Pactual Asset Management, a 9-figure anchor LP in the fund.
Cantilever was founded by Todd, a former Goldman Sachs Partner who was the Head of West Coast FIG, and David, a 30-year Wall Street veteran in structured derivatives. Todd and David hired industry veteran Ben Drylie-Perkins, who has experience as both an investor and advisor in the GP stakes space, having led over 15 GP stake and financing transactions for GPs and stakes investors as a banker at Goldman Sachs and Barclays.
We are still in the early innings of the evolution of alternative asset management businesses, with technology innovation and the opening of the wealth channel both positively impacting private markets, we are excited to help Cantilever be part of the solution for the next phase of private markets.