On 28 September 2021, Petershill Partners Plc listed on the London Stock Exchange with a market capitalisation of £4bn (US$5.5bn). Petershill Partners owns 19 minority equity stakes in alternative asset management companies which have been acquired over a number of years by private equity funds managed by Petershill, a business unit of Goldman Sachs. How did this portfolio of minority equity stakes in private markets and hedge fund managers come to be acquired in the first place? Is this new listed entity a sweet-smelling flower, ready to blossom for the benefit of its new shareholders?
For most institutional allocators, it is accepted that employee-owned asset management boutiques have a sustainable edge in the generation of alpha. There is superior alignment between the investment outcomes delivered to clients and the financial incentives of the portfolio managers. Boutiques are typically specialists; while employing far less people than large generalist firms, the team is focused on a subset of investable assets and their investment decisions are often the product of deeper, more rigorous analysis. Boutiques tend to be more sensitive to capacity, ensuring that their AUM does not grow too large to deliver outperformance. Not to mention the entrepreneurial upside and the freedom from bureaucracy ensuring a steady stream of talent escaping from the stodgy generalist firms, eager to say goodbye to the endless form-filling and time wasted in pointless meetings.
However, if focused boutiques operating within an employee ownership structure (and culture) deliver better outcomes for clients, why did the founders of these 19 firms sell minority stakes to Petershill in the first place? And why does the rest of our industry look like it does, dominated by large firms who are currently falling over each other to enter into marriages of convenience in a desperate quest to become even larger?
There are some sensible drivers for asset management firms to gain scale. The key to success in passive mandates is managing cost, tracking error and liquidity, all of which are helped by scale. The industry faces greater regulatory pressures, IT and market data expenditure is inexorably rising and ESG analysis is largely manual. Spreading those costs across a larger revenue base makes sense. Retail and wholesale distribution teams are expensive and require regional coverage. Many consultants, asset owners and distribution platforms would like to simplify their operations by reducing the number of counterparties they work with, thereby favouring the larger generalist firms. Public markets reward the more diversified and less volatile earnings potential of generalist firms, with share prices commanding a higher multiple of earnings. It is therefore no surprise to see the drive for greater and greater scale becoming the accepted wisdom in our industry.
But at what cost? Ultimately, the goal of any active manager is to generate sufficient outperformance to offset their fees and deliver net returns ahead of passive alternatives. Is it any wonder, with much of our industry structured in a way which impedes the generation of alpha, that many commentators are questioning the very rationale for active asset management?
In this article, we explore how these dysfunctions within the asset management industry structure have ultimately resulted in the emergence of a listed entity such as Petershill Partners.
The rise (and fall) of the multi-affiliates.
The 1990s and 2000s saw the emergence of asset management business models that attempted to square the circle between boutique asset managers and scale – the multi-affiliate model. Firms such as Legg Mason, Natixis and my former employer, BNY Mellon, grew rapidly. A significant component of that growth was inorganic, acquiring boutiques from founders who had established their businesses in the decades prior but who were reaching the end of their careers. By promising to retain a high degree of independence and to preserve the boutique culture, the multi-affiliates were more attractive acquirers than firms who only offered a new business card and full integration. The model spread internationally, with multi-affiliates emerging in asset management
industries across Australia, Canada and Europe.
Last month, Pensions and Investments headline story was “Multi-affiliate boutique firms under pressure”1. What has gone wrong? Most multi-affiliates operate a shared services model, with centralised functions such as finance, legal, HR and facilities. The shared services teams risk becoming misaligned from the success of the boutiques; if your incentives are to mitigate risk, the solution to most challenges is to hire more people and increase costs. Allocation of costs to the boutiques’ P&Ls can quickly descend into corporate guerrilla warfare. Before you know it, large parts of senior management time and attention is spent, not on delivering alpha, but on arguing about how to fairly allocate the costs of the staff canteen.
Shared distribution teams can be great, helping a boutique bring their story to new client segments and client geographies by sharing resources that a boutique could never afford if they had remained independent. But their incentives can become misaligned. Why struggle to win business for a difficult product that is perhaps out of favour or suffering short term performance challenges when you have a product sitting on your shelf that sells itself? Boutique leadership teams can lose accountability for the revenue side of their P&L and the focus of the firm can shift inwards, as boutiques compete for attention and shelf space.
In an environment where revenue margins are under pressure and alpha generation challenged, the multi-affiliates have responded in different ways. Some have sought to simplify their businesses, consolidating boutiques in the hope that what will emerge will retain the strengths of the component parts, not an undifferentiated mulch. Many have engaged in endless rounds of cost cutting, centralising an increasing array of functions extending deep into the middle and front office. Others have merged with competitors, in the belief that more scale is the answer… or that at the very least will buy some more time. And some have given up the ghost entirely, selling off their boutiques and dismantling their business.
The rise of the new model.
When we left BNY Mellon to found Northill Capital in 2011, our aim was to learn from our experiences and build a different kind of firm.
Each of our investee manager affiliate firms remained completely independent, with no integration of shared services.
Each retained their own distribution teams. By focusing purely on institutional asset management we avoided those parts of the industry that needed large teams of wholesalers. Our shared distribution capabilities were tightly scoped, focusing on utilities such as fund platforms and incremental geographical reach.
The working partners within our affiliates retained significant direct equity stakes in their own businesses, not the parent, preserving the direct relationship between the success of their business and the financial rewards enjoyed by the working partners.
While our investee manager affiliates ran a combined $91bn, Northill Capital only employed 17 people. We believed that adding more people to the top-co would inevitably create bureaucracy and invent forms to be filled out… the very thing that we (and our affiliates) had fled.
We were not alone. Firms such as AMG developed similar models, with direct equity ownership at the affiliate level and limited shared services focused tightly to where they would add the most value. By staying true to the boutique asset management model, these firms were typically rewarded with stronger investment performance than the legacy multi-affiliates, with superior organic growth more than offsetting the marginal cost savings available from tighter integration.
The launch of the “GP Stake” investors took this model one step further. Firms such as Petershill, Neuberger Berman’s Dyal Capital (now Blue Owl), Credit Suisse’s AMF and Blackstone’s
Strategic Partners began raising funds to take minority stakes in alternative asset managers, initially focusing on hedge funds but later pivoting to private markets managers as hedge funds fell out of favour. While each of the GP Stake firms pitch access to distribution teams, seed capital and other value-added services, their relationship with their affiliates is largely hands-off, more of a purely financial relationship.
For the hedge funds who were the initial targets of the GP Stake firms, the primary motivation of the sellers was to de-risk their personal balance sheets by turning some of their equity stake in their firm into cash. De-risking continues to be a motivation for many private market managers who are selling stakes more recently, but in addition many of these firms need cash to finance the cost of GP Co-Investment, the capital GPs invest in their funds alongside their limited partners. As private market funds have grown larger and competition from the PE giants intensifies, a sale of equity to a GP stake investor has often been essential for many firms to compete. Correspondingly, limited partners and asset consultants better understand these drivers and accordingly are now much more comfortable with their managers selling a stake in their GP to a third party.
However, by holding illiquid stakes in private asset management companies within closed-end fund structures, the GP Stake investors’ limited partners faced a question: what is the end game and how do I get my money back?
The Petershill IPO.
Last month, Petershill sought to answer that question via the IPO of a portfolio of GP stake investments. The listing returns £465m (c. $637m) capital to Petershill fund investors (and to fund carry due Goldman Sachs from the realisation proceeds). In addition, Petershill raised £547m (c. $750m)2 of new capital to fund additional acquisitions and pay expenses. The new entity, Petershill Partners Plc, listed with a market capitalisation of £4bn (c. $5.5bn) and a 29% free float, with the remainder retained by the Petershill funds for whom the assets were first acquired. Once the lock up period ends, Petershill’s funds will have the opportunity to further sell down their shareholdings in Petershill Partners Plc. The Petershill business unit of Goldman Sachs will continue to manage the new listed vehicle in return for a management fee of 7.5% of the income generated by the portfolio, 20% of net income returns on new investments (subject to a 6% hurdle) and 20% of realised capital gains3.
The new entity was listed at 350 pence a share, implying a valuation multiple of approximately 17x trailing earnings4. In contrast, the legacy multi-affiliates trade at a median 7.8x EBITDA5. Part of this premium is explained by the nature of the portfolio. Petershill Partners’ affiliates are a mix of private equity, private debt, real asset and hedge fund firms (the hedge funds have been artfully rebranded as “absolute return”.) But as discussed above, we also believe that part of the premium can be attributed to a leaner organisational structure, without the burden of a people heavy top-co eating into the returns generated by the equity stakes.
Post the IPO, the shares failed to “pop” and instead traded down, reaching a low of 294p on 11 October before retracing to 317p as of 21 October 2021. Investors appear to be concerned about the limited transparency Goldman has provided on the details of the stakes held in the underlying managers or the individual prospects of those firms. We would also argue that the fee structure is highly lucrative for Goldman Sachs relative to the costs of stewardship of what is largely a mature portfolio of existing investments and that the supermajority voting threshold required for Goldman to be removed as manager is less than ideal, given funds managed by Goldman retain a majority ownership stake. Investors who would otherwise be attracted to the asset may also hold sensible concerns about selling pressure likely to result when the Petershill funds eventually seek to divest their residual 75% ownership interest in the listed vehicle.
Despite those issues, the Petershill Partners IPO has demonstrated that the public equity markets continue to be attracted to an opportunity to
invest in a diversified portfolio of equity stakes in asset management companies. It delivers proof in concept of a potential ultimate exit strategy for the limited partners of other GP Stake funds.
Should we describe Petershill Partners as a multi-affiliate? Or should we use the term “multi-vertical private markets manager”, a somewhat clunky mouthful coined by the consulting industry to describe diversified alternative firms such as KKR, Tikehau and Blackstone?
In our view, we are not overly concerned about the industry’s latest fashion for describing business models. We’ve been doing this for 20 years. Owning stakes in asset managers, done well, continues to represent an outstanding investment opportunity. Whether this rose smells sweet will be determined by the quality of the asset managers included in the portfolio and the quality of the GP Stake investor’s ongoing stewardship of those investments.
1Pension and Investments, 6 September 2021.
2Source: BofA Securities.
3Source: Petershill Partners PLC Registration Document dated 6 September 2021.
4Estimated multiple based on $310m “Partner Distributable Earnings” for the 12 months to 30 June 2021 as disclosed in the Registration Document less an assumed 7.5% operator fee payable to Goldman Sachs and a $5.5bn post money / $4.9bn pre-money market capitalisation.
5Median Enterprise Value/2021 EBITDA for AMG, CI Financial, Franklin, Virtus, Victory Capital and Brightsphere as quoted by BofA Securities as at 24 September 2021.
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