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Private equity

Investors uncertain on ‘fund-of-firms’ strategies

Ian H. Charles said some investors are concerned over the LP/GP alignment.

Investors aren't completely sold on the strategy of private equity firms taking stakes in the management companies of other firms.

A Coller Capital survey released June 4 showed 64% of limited partners do not now invest in funds that take GP stakes and have no interest in doing so. That compares with 17% of respondents that invest in such funds and 19% that don't now invest but plan to do so, survey results show.

Even so, Goldman Sachs Group (GS)'s Petershill Group managed to raise a $2.5 billion fund in February that was oversubscribed. Managers of these kinds of "funds-of-firms" strategies have raised a combined $27 billion, according to a Coller analysis of Preqin Ltd. data.

"Some investors with the acquired firm worry about the breakdown in the LP/GP alignment when you introduce a third party, and they also have concerns about the future opportunity for next-generation talent," said Ian H. Charles, partner in the Dallas office of Landmark Partners.

"One in six LPs have already committed to fund of firms that take minority GP stakes and up to a third of LPs will consider doing so in the future," said Eric Foran, partner in the New York office of Coller Capital.

"It will be interesting to see how LP interest in fund of firms changes over time," Mr. Foran said in an interview. "This is still a relatively new strategy. There has been a lot of capital raised for these funds relative to the fact the market didn't exist not too long ago." There is still work to be done, he said: "There is still a question mark around how fund of firms ultimately will return capital to the underlying LPs and I think that is on the minds of some LPs."

So far Coller, which had 17 billion ($22.8 billion) under management as of March 31, hasn't made GP stake investments, Mr. Foran said.