It’s tough for new fund managers to land investors, particularly for those raising small funds for uncharted investment strategies. Even the established private equity giant TPG has had mixed success convincing investors of the opportunity in new fund managers: fundraising for its TPG Next fund, which takes minority equity stakes in emerging and diverse managers, has stalled after a $500 million anchor investment from pension fund CalPERS in 2023.
In light of the challenging fundraising environment – and political hostility to diversity and inclusion efforts – TPG Next is reframing the strategy on the upside potential of “GP stakes” in managers with less than $1 billion in assets under management. Top-performing new private equity fund managers that have raised and managed fewer than three funds “tend to outperform” established managers, “without additional downside risk,” writes the TPG Next team in a short deck on its strategy.
“Many of the most successful alternatives firms in the market today, including TPG, benefited from minority capital as they scaled,” they write.
Untapped opportunity
Private capital markets have trended up over the past decade, despite a prolonged fundraising slump. They are projected to continue growing annually by more than 13% over the next five years, notes the TPG Next team.
“Despite the rapid growth in private markets, the share of capital raised by funds with less than $1 billion in assets under management is at record lows,” the team writes.
GP stakes strategies aren’t new in private equity, but most funds focus on established managers with larger funds. TPG Next has deployed capital to managers like Harlem Capital, VamosVentures and Caro Investment Managers – all diverse-led firms. It most recently invested in Ardabelle Capital, which invests in European companies building supply chains for the sustainable transition.
Finding alpha
To make its case, TPG Next’s deck focuses on the financial opportunity of GP stakes for investors: “a bond-like cashflow stream—via their share of fee and performance-related earnings.” The “potential for significant equity upside” comes from exposure to a fund’s current income streams and future profits.
The TPG Next team cites a study last year from Cornell University researchers that analyzed the performance and assets under management of more than 100 fund managers that had sold a stake in their businesses.
“These managers attracted more investment partners, raised more capital and outperformed the public market after selling stakes,” they write.
