Investing Billions - E319: GP Stakes Investing: Liquidity, Alignment, and the Real Risk

Episode Date: March 6, 2026

Why would an LP invest in the GP instead of the fund… and what problem is GP stakes really solving? In this episode, I sit down with Todd Owens, Managing Partner of Cantilever Group, to unpack the world of GP stakes. Todd explains what investors are actually buying when they take a minority stake in an alternative asset manager, why liquidity risk is the central challenge, and how structural innovation could reshape the asset class.

So, Todd, your managing partner at Canaleaver Group, where you focus on GP Stakes, why do you like GP Stakes? It's a very interesting and new asset class, new in the last decade, and it provides an opportunity for investors to partner with the principles of private asset money managers. And so we think it's a very interesting space with a lot of tailwinds and a very deep number of potential times. When you invest into a manager, what exactly are you buying and how do you look at it as an investment? Yeah. Fundamentally, GP states investing is a minority equity investment in the operating business of an alternative asset manager. And what that means when you drill down is you are purchasing a participation in the fee streams that are derived in these private asset managers. So specifically, management fees, carried interest, incentive fees, and other fees that come about for managing the capital. And when LPs look at investing, they could invest within the fund, they could invest in the GP's stake.

How should an LP think about whether they want exposure to the fund or exposure to manager? Yeah, that's a good question. So as an LP, you're investing in a fund that's managed by the GP. And the economics can are related, of course, but they think. can be different. And so if you are investing in, for example, a private credit business, those returns will be somewhere between 8 and 12 percent at the fund level, whereas if you're making an equity investment at the GP level, those returns are more commensurate with equity investing and more like private equity. It's a derivative of the same business. And there are

lots of examples of investors doing both, being an investor in the fund, but also owning a portion of the economics at the management company. What's the downside risk when you make a GP stake? And what are you exactly underwriting to? Well, there's a lot of ways to answer that question. But let's first start with one of the issues in GP states investing, which is as a minority equity partner of the underlying firm, it's hard to predict when or even whether there will be any liquidity for that investment. You don't control the exit. So if you think about a private equity fund, the management company of the private equity fund can determine when there will be liquidity.

They can determine when to sell a portfolio company. In GP-6, that's not the case. You are a minority equity partner and cannot make that decision. And so you are, in effect, betting with the principles of that firm and relying on them ultimately for your exit. So that's one of the big issues or concerns that one might have about investing in GP stakes. Lack of liquidity. Lack of liquidity or unpredictable liquidity. You've seen GP stakes managers evolve their strategy around providing liquidity to their underlying LPs. Where does that sit

as a solution for LPs today? Yes. So for sure, the GP stakes market has evolved rapidly. And many of the managers of GP stakes funds have pursued ways to provide liquidity to their LPs. I would say that that is still evolving, really, and there's no perfect solution yet broadly defined for the market. But among the things that can happen are underlying firms can themselves be sold or go public, which results in a liquidity event for the fund and the GP states investor. We've seen plenty of examples of strip sales where a portion of the portfolio is sold to a new investor. It's almost like a continuation vehicle, and that can provide liquidity to the underlying investors. There are levered recaps, effectively, of the funds, and that can provide liquidity.

There have been some efforts to list publicly, although that hasn't been done in the United States, but there are examples of public listings in Australia and in the U.K., which is another way of providing liquidity to the initial LP investors. And Peters Hill, which was part of Golden Sacks, famously went public. What went wrong? Why didn't that work? In Peters Hill, it's important to start with the following observation. The investments in that portfolio did quite well.

The portfolio performed well. The underlying investments, by and large, not all of them were perfect, but by and large, the portfolio performed quite well. The issue really was that the structure and the venue were not right for that type of a listing. Most of those investments as a, for example, or one point is they were investments into U.S. firms, but the investors that owned Peters Hill publicly were not U.S. investors in large part. There were some. This is a generalization.

But it was harder to explain to U.K. investors what was in the portfolio. I think there were some other structural issues that they had to contend with. There were the dividend policy and how they approached that, paying corporate taxes, which was a leakage. But I think the biggest issue really was the venue had a hard time or the investors in the venue had a hard time understanding what they were investing in. And you're looking to solve this at Canola River Group. Tell me about that.

So we've designed our entire business to be able to. be able to list our fund publicly in the United States. And it's hard to do. Many of the larger firms like Peters Hill can't do it because the affiliate rules under the 40 Act are prescriptive. We think the only way to do what we're doing is to be an independent business, which we are focused only on GP stakes, which is what we're focused on. And there are other hurdles work that has to be done from a structuring perspective to enable us to convert our fund ultimately into a 40-acted vehicle and provide liquidity to our investors through a public listing in the United States. Is that what you're really solving around liquidity or are there other reasons to go

public? Going public creates a lot of benefits. Most importantly, for our LPs, it provides liquidity and we think is an enhancement to the overall return profile of their investment. For our affiliates, it's also helpful because we are truly a permanent capital partner. They don't need to wonder. We talked earlier about some of the ways of getting liquidity. As an affiliate, you don't need to worry about that with our model because we have no need or interest really in getting liquidity for the underlying investments. And so our affiliates don't have to.

to look over their shoulder or wonder about that. And then for our business, we're creating a permanent capital vehicle in an interesting asset class, and that would be a nice position to be in. Said another way, you're aligning yourselves with the GPs that you're investing in, and you're also solving this problem for LP. So instead of creating this ballooning issue that you have to solve in year 10, where you might have to go to the divorce with the manager, you're basically pre-solving for this problem and allowing the capital markets to work for you. Yes, that's a very good summary. It's not lost on us, by the way, while we were pre-solving this and coming up with the business model

that many, many firms raise billions and billions of dollars to pursue GP-States investments. Still, we like our model and we like the ability to provide liquidity to our LPs. One of the hardest things of investing is seeing what's shifting before everyone else does. For decades, only the largest hedge funds could afford extensive channel research programs to spot inflection points before earnings and to stay ahead of consensus. Meanwhile, smaller funds have been forced to cobble together ad hoc channel intelligence or rely on stale reports from sell-side shops. But channel checks are no longer a luxury.

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most famously by Dial and Blue Owl, but there's other players as well in the space. how do you look at your positioning in the market and has that evolved over the last couple of years? We, by design, are focused on the lower middle market and what that and middle market, lower middle market can be confusing. So what we mean more specifically is that we want to be able to make investments that are between 15 million, one five on the low side and 75 million on the high side. But with a focus really on the lower end of that, we like to make 20, or $25 million investments into these firms. And that part of the market for a variety of reasons is attractive.

There's less capital focused on that space. So the names, David, that you just mentioned, are mostly looking at deals that are $100 million or above. And in the market below that, there are fewer providers of capital. And so we like that space. It's not, of course, without its risks, but we think the opportunities there are substantial. How much of your deal sourcing is push versus pull? In other words, how much of your deal sourcing is solving a problem that GPs knowingly have versus selling to GPs about a

partnership with Cannelly? When I talk to potential affiliates, when I talk to these alternative asset management firms about potentially selling a GP stake, I almost always say that our product is not sold, it's bought. I'm not going to talk a firm into taking our money because it's expensive. We need to get a mid-20s-type return profile for our investment. We need an equity return on our investment. And if the underlying management company doesn't need that capital, I'm not going to be able to talk them into it. And so it's only if they have a need for that capital that justifies the cost that it makes sense to take our investment. And it's at that point really that, that deals can move forward. I should say, in many cases, we have conversations

that last a long time. And at the start of the conversation with the manager, we're educating them a little bit on the availability of capital. And then really, they have to decide if it's something that's appropriate for their business. Is there an 80-20 rule to why GPs are looking to sell a stake? Are there one or two reasons why routinely come up? We think of them as, as three reasons, really. And the deals that we do have done and the deals that are in our pipeline really fall into the three baskets. The first basket is growth capital.

They are using our capital in a variety of ways to accelerate the growth of their own business. The second use of proceeds is capital restructure. And so that would include, for example, buying out a retiring partner or buying out angel investors that help stand up the firm originally. It can also include just the benefit of having a third party put a price tag on your business when you are starting to think about generational transfer and how to handle that. So that's the second bucket. And then the third bucket is taking money off the table. And in many of the firms that we invest in, these are principles who have been focused on building their business over 10 or 12 or 15 years, and they're at a stage where they'd

like to take a little bit of money off the table. And obviously, that's the least interesting use of our capital, but it's use of proceeds that we can underwrite to. I would say the majority, not quite the majority, but the biggest use is really growth equity. I want to double click on that. Growth capital. Is there also two or three ways that GPs user capital in order to grow out there are some best practices? Yeah, absolutely. The easiest way to think about it is that our capital can be used to fund GP commitments. And that's, I think, reasonably straightforward.

And in many cases, the funds that we're investing in have growing flagship funds. They've gone from 250 to 350 to 500 million, which means the dollar magnitude of the GP commitment is increasing. And then on top of that, many firms want to increase the percentage and believe that if they can make a 5% GP commitment instead of a 2% GP commitment, it will de-risk the capital raise or allow them to raise a larger fund. So that's the easiest way to think about our capital being used to grow the business. Another way to think about it is that our capital can be used to seize a new strategy, for example. And many of the firms that we invest in are at a bit of a turning point in their business

where they're well established. They're on their third or fourth fund. They've been in business for 15 years. They have a good team. They have a good track record. And they're starting to think about how to grow and diversify their business. And one of the ways to do that is to launch an adjacent strategy. So you can think about a MES lender wanting to offer.

for a senior loan product, or you could think about a mezz lender wanting to launch a control strategy. And our capital can come in handy and seething those strategies. So that's another typical use of growth capital. I want to double click on the GP commit aspect of the business because I think that's really interesting in this hyper-competitive market. It's very difficult to fundraise today in 2026. Is there a break-even point where the managers are in a better place than before taking that capital? Yeah, David, I think actually by definition, in all cases we make an investment where we assume that to be the case.

In other words, if you're taking our capital and paying us a cost of capital that is, let's just say, a 25% cost of capital, you have to feel like it's worth it to do that. And that either the impact of that capital on your ability to grow is higher than that cost, or it accomplishes something else that's important to you, like a generational transfer. If you don't have a use of that capital that is comfortably above the cost, then we think you probably are looking at the wrong type of capital.

You should perhaps borrow money from a bank or from another lender at the GP or not do it at all. Our capital really fundamentally is meant to accelerate the growth of the underlying managers. When you think about starting new product lines, let's say you're in private equity, now you're starting private credit. Is there a way to structure these GP stakes in a way that you're only giving up the upside and the new opportunity, given that the downside is taken care of? Or is it always at the parent company level? That's a good question.

So the answer is yes. You can structure it in such a way that the GP capital is invests in only. the GP of the new strategy. That's not an investment that Cantilever likes to do because part of the critical thing in GP stakes in our view is full alignment with the partners and the principals who are running the firm. And if we buy only a piece of their business, then the alignment is not right. And so it's possible to do that. Many of those types of transactions are more structured. They're not equity. They can be a structured preferred or even a structured debt investment, where the return is acceptable coming from the single strategy and where alignment

is not as critical with the overall team. But as equity investors in businesses, we want to invest in the entire business, not just a piece of it. There's this evolving term GP Solutions. So yeah, GP staking for the first decade. And now a lot of your competitors are focused on GP solutions. Give me some use cases of GP solutions that are being used in the market today. Yes, so you're absolutely right. GP Solutions is the idea that there are a variety of ways that an alternative asset management firm can capitalize its manager. And so the way that we talk about at Canoliever is a minority equity investment. But you could imagine a firm, and we run into this all the time, you could imagine a firm who would prefer or which, I should say,

would prefer to do a debt financing. They're not selling a piece of their business. The cost of capital is effectively lower. And depending on what the use of proceeds is, that might be a more appropriate way to finance the business. And so when we use the word GP Solutions, it's a little bit like you can provide anything in the capital stack.

You can provide equity. You can provide preferred or you could provide a term loan. And that to me is capital solutions. at the GP level. A more broad definition would also include things like secondaries, continuation vehicles, nav lending, and other products that while they don't sit necessarily at the GP, the GP might use in their underlying funds. You mentioned that the second most common use of GP stakes after growth levers is capital restructuring, taking out maybe partners that are no longer active, early investors that are no longer part of the

fund. Talk to me about that. And how does that actually solve the problem? Aren't you just taking debt capital on the cap table and changing it to cantilever? How are you solving a point? Support for today's episode comes from Square. The all in one way for business owners to take payments, book appointments, man and staff, and keep everything running in one place. Whether you're selling lattes, cutting hair, running a boutique, or managing a service business, Square helps you run your business without running yourself into the ground. I was actually thinking about this the other day when I stopped by a local cafe here. They use Square and everything just works. Check out is fast, receipts are instant and sometimes I even get loyalty rewards automatically. There's something

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not guaranteed. Paid memberships with a connected payment account required. See Experian.com for detail problem. Yeah, it's not necessarily debt capital that we're replacing, although it can be. In many instances, these firms have been created with the support of, for example, friends and family. And the firm's been around for 10 or 12 years. It's done very well, but not so well that the principals feel they can buy out the initial investors. And so our capital can provide a respectful exit for the early investors. It can consolidate a relationship from a bunch of early investors to one institutional capital partner, and that's really, really helpful in the right set of circumstances for some of these managers. On top of that, there are many instances where the early investor

was not, don't think friends and family, but think private equity or some other form of capital, where ultimately they need liquidity for their investment because they made it out of a 10-year fund, for example, and that fund is at the end of its life, and they need to get liquidity for the investment. And so by stepping in and buying that stake, we can provide liquidity for a firm like that as well. The third most common case, you mentioned, taking money off the table. A lot of LPs are uncomfortable with GPs taking money out the table while they're investing to the fund. Talk to me about that. And what's a red flag? What's a yellow? What's a red flag when somebody's taking money off the table and what's a legitimate reason?

That's a good question. I think it's an important. Our view is that you have to underwrite the use of proceeds regardless of the use of proceeds. And furthermore, when you look at some of these firms that we're investing in, there's a lot of overlap between a personal balance sheet and a firm balance sheet. Those are not bright divisions in firms of this size or indeed in much larger firms. And so when we are underwriting a deal, what we consider is the implication of our capital being taken out of the system. In other words, taking money off the table for the principles to use that term. And we want to make sure that the magnitude of that is not so much that we would expect the principles

to change their approach, to change their commitment to their business, or really to change much of anything. And so we look very, very closely at our net proceeds that are leaving the system. How does that look relative to the balance sheet of the partners who've taken the money off the table? And can we get comfortable with that risk profile? I think a red flag for us as a general matter is if we're investing in a firm where the principal is wealthy, it's a red flag.

It's unclear to us why they need our money. And so typically we would stay away from those types of situations. It's one of the reasons that we have a hard time getting comfortable with mid-sized hedge funds as a for example is because taking money off the table where the principal has already taken a lot of money off the table seems like a red flag does. I think the devil's in the details here. There's a president in startup secondaries. So before it was this black mark for a founder to sell secondary.

So even if it was a Series D, Series E, Series F company, VCs would not allow it. LPs were not happy with it. And then they evolved this use case where if you could get somebody to take a little chips off the table to remove some of that stress of house car baby, then you could really focus on how do we build a world class organization. because what was inevitably happening with those startups is that financial pressure was forcing either that company to sell early or to go public early, both which were inefficient for everybody involved. But there's this efficient frontier maximal result where a little money could actually help align everything. Yeah, look, we believe that. And I should say that among the larger firms,

more than half of them have sold GP-6s. And so the path, has become somewhat well-worn, and concerns about selling a GP stake, I think, have diminished by virtue of the fact that many firms have done it, and there hasn't been a significant change in how they run their business or in what the returns are. And so I think that LPs and other investors are increasingly comfortable with it. That's not to say that there are certain LPs who remain skeptical about a firm selling a GP stake. But we do think, fundamentally that our investment enhances the ability of the firm to grow, to continue to institutionalize itself, to diversify itself, to incentivize a next generation. And when we make an

investment, we are attempting to identify a firm that is a business, that will be in business for 10 years or 20 years, and will continue to institutionalize itself. And that's really the point of our capital. If we see an opportunity where we don't think if a firm is capable of doing it, that would be another red flag for us. There's this art to that, which is what is a firm or maybe a founder or two and what is a business? How do you differentiate between this, do you think? With difficulty, to be fair. That is a tough distinction to make. You get to know the firm, you get to know the principles, you get to know what they are trying to accomplish. You meet the junior team, you assess how committed they are to the business, what they see is their future with

the firm. And all of those things can lead to a conclusion that it's a business rather than just an investment partnership. But sometimes, and we've seen a number of cases where we couldn't invest because it was not clear to us that it was a firm, we can underwrite lower growth in our investment model, but we have to have some growth. It has to be a business. And what I say in some settings with potential affiliates is, I don't need you to double your business in five years. I need you to just be growing steadily. Doubling would be great. Don't get me wrong, but I need you to grow steadily and I need you to be there in five years and in 10 years. And that's really the basis of our investment. What are you looking for in managers when assessing whether you want to invest in so?

Any asset management business starts with returns. What is the return profile? How do they compare to other competitors and what does that mean in terms of their existing LP relationships? I mean, that's very fundamental. A second thing is, do we believe the management team? Do we believe the principles and founders want to continue to grow and build their business? We talked about that a little bit already, so that's fundamental as well. There are a lot of, I don't want to call it, ticking the boxes, but making sure that all of the infrastructure makes sense, that the SEC filings are good, and all of those other things also bear on the overall underwriting. But really, asset management is a people business. You have to respect and trust the firms that you're

investing in and believe that you're aligning your own interests with their long-term interests. And that involves getting to know the principles and ultimately making that judgment. That's the most, I think the most difficult and the most important thing that we do from an underwriting perspective. The firms that we're investing in are usually on their third or fourth fund. And so by definition, their performance has been good enough to get to a fourth fund. By definition, their relationships with LPs are good enough to get to their fourth fund. And at that point, you need to understand what direction they're taking the business, what they want to build, and can they replicate the success that they've had so far.

Like we mentioned, this art of figuring out whether they're a person or a firm in a sustainable business, how long does it take to assess that, the qualitative measures of a team and what the future of their firm looks like? It can take a long time. I mean, we have, for many of our investments, we are in conversations with the firm for a year or more. We have conversations ongoing today that are 18 months long. And so it can take a long time at a minimum if we're involved in an auction process where there's a banker involved and they're speaking to a number of firms, that's a process that is pretty intensive, but it's three, four, five months, usually at a minimum. So even though it's an auction, there's still a lot of dating going on to make sure there's fit. There is. And the dating's important both ways.

It's important for us as a minority equity investor, but it's also important for the affiliate to understand what we're motivated by. Do we have a common vision? Is this somebody that you want as your capital partner for five years, 10 years, 20 years? And that's a big step for any firm to take. And it's a big step for us to take as we're making our investment. And so we do spend a fair amount of time with the affiliates. Are there cases where it's a good investment?

You have downside protection. you see your path to your return, you decide to say no. Yeah, for sure. I mean, that happens, has happened a number of times. Sometimes it's that we can't agree on price or that they have a higher priced offer from another firm. We lost two deals last year in each case because we were uncomfortable moving to a higher price. Both of those were great firms.

but we couldn't get there from a price perspective. So you invest and now you're a partner in the business, you own a stake of it. How do you come in as a partner and provide value to the underlying GP? We think about it really in three components. The first component is that our capital is by itself strategic. If the firm goes out looking for growth capital and decides to do a transaction,

they need that capital to achieve some of their objectives, whether that's growing, whether it's capital restructure, the things that we talked about earlier in the podcast. So that's number one. Our capital is by itself strategic. Number two, we bring decades of experience advising asset management and alternative asset management firms. And as a capital partner, we are also a strategic partner, and we believe that we can help them think about strategic topics, how to grow, how to diversify, should we add a product, should we add a step-out investment strategy, should we hire a team, should we buy a team? Those are types of topics that we have substantial experience in. And in the part of the market that we're focused on, these smaller firms,

They don't always have ready access to that type of advice. And we have found that for the conversations that we have with potential affiliates, that that is a very attractive thing. And then the third bucket is really something that we'll build over time, which is to provide our affiliates with available services or offerings that can help them in their business. Many other GP stakes firms have built similar support structures, and we will, as we build our portfolio, add those as well. That can include distribution, for example.

That's a critical thing for these firms. It can include advice around generational transfer, another critical thing. But we will build that over time and make those available to our portfolio companies. I should have really started the answer to your question to point out that we are, our capital is by itself strategic. It's also passive and permanent. And so we start with can we help you, but we're not going to control the business. We don't want to control the business. We want the principles to control the business and make the important decisions. If we can be additive to that, we're delighted to do it, but fundamentally ours is a passive type of investment. The GP is the main character. or you're an advisor. Exactly right. One of the most interesting things about GP stakes is when you invest, you're on the GP side versus the LP side.

Are there strategic benefits to being on the GP side? And if so, what are some of those benefits? When you're investing at the GP, you are really partnering with the founders, with the principles of the firm. It's critically important for a GP investor as well as an LP investor that the underlying performance of the funds is good. The returns are good and the core strategy that drives everything. And so there's no misalignment in that regard.

But as an investor at the GP, there are potential strategic benefits. We see co-invest deal flow that we wouldn't otherwise see. We see interesting potential future investment opportunities. We can help these firms also think about other strategic things, like, for example, selling the firm. In our part of the market, we wouldn't be surprised that a number of the firms we invest in ultimately sell control of their firm in five years or seven years or ten years. And so we can help them think about that as well.

You're in a very interesting part of the market, $15 to $75 million deals. So you're in lower middle market. I'm sure you get pitched many venture capital firms that want to sell a GP stake. Is there some product there, whether currently or you're, evolving, that makes sense for you guys to invest in a venture capital firm? And if so, what does that product look like? So investing in venture capital businesses, we think is difficult. And the reason for that is that it's hard to persuade yourself that there's enterprise value, that there's really a business in our part of the market. It's clear to us that there are

large venture capital businesses that are businesses that have enterprise value. In the smaller end of the market, it's harder to come to that. conclusion. And so the bar for us is quite high when we think about investing in a venture capital business. We don't like the fact that there are a few barriers to entry. And we also don't like the fact that there are a few barriers to exit. And that actually is even of the two, the more concerning. Where we've found opportunities that we like, and we have not made an investment in a venture capital business, but where we have found opportunities that we like, it's often a venture capital business that has built other parts of the business that.

are hard to replicate that would take years to build. So we've seen, for example, venture capital businesses that have created an AI-generated sourcing engine for their investment strategy that has significant, it has a significant database. And when we look at that, we see a business that would be hard to replicate. The principles just can't leave and walk across the street and start over. And so that begins to feel more like a business to us. And it would be something like that, I think, that would open up the idea of an investment in a venture capital firm. Just to play devil's advocate.

You mentioned barriers to entry. What are the barriers to entry when it comes to private equity and private credit that are different than venture capital? In other types of alternative asset managers, the barrier entry is that it can take a long time. It's a more steady progression. If you raise your first fund and do well, and then you're a way. and then you raise your second fund and your third fund, you've really sort of created something that you can look at and audit.

The same is true to a degree in venture capital, but the issue is that that second fund may make all of the principles extremely wealthy. Or that second fund might be something that performs very poorly, and at which point the venture capital firm can just shut down and walk across the street, go to the beach for a couple years and then start over, that's not investable for us. And so there are overlaps and there are similarities. But when you look at private credit or private equity or infrastructure or secondaries, there's much more of a repeatable investment process than you typically see in the venture space. Is that another way venture could be too volatile for its own good as a GP stake?

Yes, that's a better way of putting it. It can be too volatile, both on the upside and the downside. If you could go back to 1990 when you had just graduated college and you started at Goldman where you became a partner, what would be one piece of advice you'd give a younger, Todd, that would have either accelerated your career or helped you avoid cost of mistakes? I talk a lot to folks who are starting their career on Wall Street. And what I talked to them about is really a couple of things. Number one, invest in your network. If you go to work at a place like Goldman Sachs, the people who are,

sitting around you and the people that are in your analyst class or your associate class are going to do amazing things. And so spend time and be deliberate about building out your network because whatever you do in the future will benefit from those types of relationships. The second thing I tell people is do something that you enjoy. If you hate your job, you're not going to be good at it. And it's a waste of everybody's time. So find something that you love to do and you will enjoy it, of course, but you're also going to be better at it. And so that's the second, I think, piece of advice that I give to folks. And then the third thing is there's a career arc for most people and significant investments

at the outset paid dividends in the long run. And so be prepared to work really, really hard, particularly in the early years of your career, and you have to trust that that will pay dividends in the long run. Absolutely. Well, Todd, this has been an absolute masterclass. Thanks so much for jumping on the podcast. I'm looking forward to continuing this conversation soon. David, I appreciate the time.

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