GP Stakes Private Equity Fund Investing

Lincoln Archibald:

Hey, great to be here. Thanks for having me.

Elana Margulies-Snyderman:

Absolutely, Lincoln. So, to kick off the conversation, tell us a little about your firm and how you got to where you are today.

Lincoln Archibald:

Yeah, no, it's actually really exciting. I guess this whole GP seeding and working with emerging managers started about five years ago, where we started kind of an incubation business for first-time funds, helping them get off the ground, partnering with legal and admin, compliance, helping them build their pitch decks, their data rooms, go-to-market strategies, just everything that a fund needs. We actually incubate about a hundred funds a year out of that business, and we kept seeing opportunities to finance these general partnerships to acquire minority interests in these general partnerships, which finally led us to launching our GP stakes fund, and GP stakes/GP seeding, really at the beginning of this year. I'm happy to go into the differences of those.Yeah, we've got this awesome community of emerging fund managers, and partner and invest with the best.

Elana Margulies-Snyderman:

Lincoln, that segues nicely into the follow-up question I have for you. Given your focus on acquiring GP stakes in emerging funds, love to hear your high-level outlook for the space.

Lincoln Archibald:

Yeah, well look, I'll break it down. There's GP stakes and there's GP seeding. GP stakes is acquiring interest in really pre-existing firms that have enterprise value. So, there can still be a stake transaction on a Fund I or a Fund II, but you're acquiring the interest at a fair market value. GP seeding is where we search and participating in GP economics, but really, you're just functioning as a strategic advisor/limited partner to that extent. So, you're not actually purchasing the enterprise value. It's more sweat equity because it's a brand-new firm, and you can still acquire interest in these firms and co-invest really in their deals. What is my outlook? I'm extremely bullish on the industry. I think I've mentioned before, we might've had a conversation about it, where in any asset class, some of the largest deals are always done at the beginning of the asset class life cycle. So, you look at leveraged buyouts, the biggest deals were done at the beginning. There was the most margin, the most profit. There was just kind of the most clear winners. And then as an asset class matures, that's when it starts to go into the middle market or lower middle market of that. We're out of a space in the GP stakes/GP seeding market where there's been a lot of activity in the largest funds out there. But I mean, man, even within the past couple of years, the number of firms that are seeking to participate and work with emerging funds is astounding, really. It's really exciting to see all the players entering the space. It's really a capital need at this point. The ratio that InvestCorp put out is about 21:1. For every dollar that is available to be deployed in emerging managers, there's $21 in need. So. there's a lot of demand for this asset class, and really excited about the coming years and decades.

Elana Margulies-Snyderman:

Lincoln, more specifically, where do you see some of the greatest opportunities in your space and why?

Lincoln Archibald:

Yeah. I think the most opportunities are with the brand-new managers on the seeding side. I think that there are not a lot of resources out there supporting the first-time fund manager. I think us and anyone else participating with true first-time founders, there's great economics to be had and there's great participation to be had with focusing on brand-new managers. Now, there's a reason not everyone works with them, it's because it takes a lot of work. Managing a fund is managing a business, and there's a lot of effort that needs to be put into these companies to realize value. So, it is more of a higher effort intensive strategy, but I think that's where the best opportunities lie.

Elana Margulies-Snyderman:

Lincoln, on the other hand, what are some of the greatest challenges you face in your space and why?

Lincoln Archibald:

Yeah, I think that emerging managers is kind of a funny topic as you talk with LPs, specifically their allocations and getting families or high net worth or institutional allocators carving out and really intentionally allocating to first-time funds. There's a lot of statistical support that first-time managers actually do better for a myriad of reasons. They're focused on one product. They've got a lot to lose really, a first-time manager. They're typically in kind of a career pivot, and so there's a lot more hustle, a lot more conviction in their first-time strategy. Statistically, the numbers don't lie that earlier vintages outperform their later more mature fund peers. I would say the biggest challenge is just convincing LPs that don't previously participate in emerging funds, the need to have exposure and the benefits of working with emerging fund managers.

Elana Margulies-Snyderman:

Lincoln, to shift gears a bit, ESG and DEI are top of mind, and wanted to hear your thoughts how you're addressing these topics.

Lincoln Archibald:

Yeah, great question. Look, it's no mystery that the majority of the high finance industry is dominated by largely your traditional Ivy League. It's a very white male-dominant industry, unfortunately. We think we get to participate in those initiatives merely by servicing these emerging-level managers. And let me explain. There's two types of emerging funds. There's your traditional manager, which I would describe as somebody who attends an Ivy League school. They work on Wall Street for maybe 20 years, and then they spin out, and they launch their flagship fund, and it might be $500 million or a billion or more, and they've got all the right connections, the right resources, and the ability to do so. But for every one of those, we see 20 to 30 untraditional managers, somebody that just fell into investing, that started putting their own capital at risk into these strategies and started syndicating deals on a deal-by-deal basis, and a little more scrappy or entrepreneurial, but I feel like still have every right to manage money. Now, of that population, it consists of a lot more minorities, a lot more women, a lot more people of color, of diverse backgrounds that aren't coming from these maybe more prestigious backgrounds, but are coming from non-traditional schools, non-traditional backgrounds, and we think we're servicing the minority there. As far as our mandate, I wouldn't say we look exclusively to invest on a DEI or ESG basis. We believe that the work we're doing is incredibly impactful as it stands, and the majority of the people we see are minority. You invest what you see in, and you invest what your pipeline consists of. So, I wouldn't say we have a strong mandate. We're at the end of the day trying to invest on behalf of our investors in the highest and best-case uses, but still believe we have an incredible impact.

Elana Margulies-Snyderman:

Lincoln, we've covered a lot of ground today and wanted to see if there are any final thoughts you'd like to share with us.

Lincoln Archibald:

Yeah, look, starting a fund is hard at the end of the day. It is an incredibly challenging business, and there's so many moving pieces, and it can be intimidating really to leave your 9-5 or leave your whatever, the comfort of your current career and start off on your own, but at the end of the day, it's incredibly worth it, and it's incredibly empowering. I love the work that we do in working with emerging managers. There's a lot more resources out there than one might think. There are firms that specialize in an abundance of capital out there to be deployed into emerging funds. I know I talked about that being one of my pain points, but I'd be doing the industry a disservice if I didn't say that at the end of the day, allocators need good managers to manage their money. They need places of yield. They need areas of growth in their portfolios. And being an emerging manager, you can really identify edges and opportunities to have a leg up on the more seasoned peers. So, don't feel like you're going up against the biggest and baddest firms out there, but there's a lot of allocators that look for allocation to emerging managers, and there's a lot of resources out there to support them.

Elana Margulies-Snyderman:

Lincoln, I wanted to thank you so much for sharing your perspective with our listeners.

Lincoln Archibald:

Yeah, no problem. It's great to be here and thank you for all the work you've done for us and supporting us and great to be on the show.

Elana Margulies-Snyderman:

And thank you for listening to the EisnerAmper podcast series. Visit eisneramper.com for more information on this and a host of other topics. And join us for our next EisnerAmper podcast when we get down to business.

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