Lincoln International Managing Director Antoine Dupont-Madinier recently joined the “Keeping Pace with a Fast Changing GP Landscape” panel at IPEM Cannes where he discussed market dynamics alongside a fellow industry expert.

What are some of the key strategic drivers motivating buyers and sellers with respect to GP M&A activity?

“We’ve essentially seen a continuation of some of the trends that we’ve been seeing for a number of years in terms of how GPs make more acquisitions. It’s primarily been driven around acquiring the adjacent capabilities and gaining sometimes geographical footprint. Whether they come from the private equity or private credit world, we’ve seen them [GPs] acquiring real estate, infrastructure, private equity, whatever they were missing, to become more of a multi-solution investment provider to their LPs.… From the seller’s point of view, the motivations are quite diverse: generational change is often a catalyst for a transaction…but also a desire to find a platform, a home that can accelerate the growth of their own business, because of the attributes that the buyer’s platform offers, whether it’s around global distribution capabilities or access to anchor or seed capital.”

What are the key areas of focus when assessing the quality of a GP?

“There’s multiple…the quality of the management team, of the owners and the founders of the business, the track record would be another one. And, the quality of the investor base, just to name three, but there are many more. Quite often these criteria are intertwined. Good performance helps with longevity of relationships with LPs and with the fact that they will re-up from one fund to another…you can’t see them in isolation.”

How do GP business models vary from one another?

“To start with, they might not charge the same fee rates…so there’s a discrepancy between the two and twenty which is not always the standard. Depending on the investment strategy of that GP, there might be more or less operational leverage which means that you might need more people to look after a billion, two billion or five billion. You can see that this has an incidence on the EBITDA and the profitability of the business.”

How do you handle an M&A discussion? In a formal process or off-process?

“I think every situation can be different. There might be situations where a bilateral discussion might be more appropriate, others where a process would be. I would highlight that processes in asset management deals can be quite different to processes you might see at the portfolio company level of private equities. Here we’re talking about a strategic activity…you could qualify these as processes with a small p as opposed to a capital P.”

What role is played by minority GP-stake investors in this evolving GP landscape?

“I think that they’re playing a very different role. What they do is they acquire a minority stake, they have a passive role and their tenure is to hold on to the investment and not to exit…they provide partial monetization to the GPs without relinquishing control.… We’ve seen transactions where proceeds have been recycled in the GP commit or have been helpful in expanding the footprint or adding a new strategy, etcetera, i.e., making the GP bigger.”

What are the critical success factors for an acquisition? And what about the cultural dimension of such mergers?

“These are people businesses, first and foremost…when we engage with clients on those strategic initiatives, we encourage them to do fireside chats interactions. Whether it’s a minority GP stake or a more controlling transaction, in both ways, you’re going to be with the other side for long, and you want to make sure it’s the right decision.”

What insights can private market asset managers glean from the substantial transactions that the traditional asset management industry has encountered in the past?”

“I would say there are differences. There are some transactions that have taken place because in a slightly declining revenue margin environment, higher cost of operating, consolidating and focusing on cost synergies is the right strategy to go ahead. I think what we’re seeing right now with the private markets alternative space, it’s more about expanding the revenues, consolidating the relationships, i.e. making the top line bigger.”

 View the full IPEM panel below: