Historically, GPs would exit a deal through an IPO. However, in today’s environment, most deals are too small for IPO. Therefore, GPs are exiting a deal by selling to another GP – also called a GP to GP deal.
April 2, 2020
The number of these deals has risen substantially since 2010. Furthermore, as the above chart highlights, it has held steady around 35% the last few years. With more GP to GP transactions in the market, are these more favorable than “regular” deals for GPs?
Are GP to GP Deals Better or Worse?
To determine if they are better or worse than “regular” deals, let’s approximate “regular” deals through all buyout deals. Let’s also look at these deals, at acquisition, for leverage multiples and money multiples.
As it relates to leverage multiples, GP to GP transactions consistently have more leverage in every time period than all buyout deals. This could be because the businesses are better run and less risky – therefore able to maintain greater leverage. This could also indicate that future growth might not be as robust, and more leverage is needed to create the desired return.
If we look at this through a money multiple basis, does the same difference persist? Unusually, it does not. There is little difference between a GP to GP transaction and all buyout deals on a money multiple basis. In fact, as the chart below shows, the return band is tighter. Additionally, the risk of loss can be generally far lower for GP to GP transactions – in spite of higher leverage.
When looking at GP to GP transactions, we find it best to view these deals as normal transactions. As the data shows, these have no meaningfully different return profile than any other deals undertaken in the private markets.
To leverage further insights on deals, check out Cobalt LP’s exclusive deal benchmark. Learn more about this deal level benchmark here.