Goldman Plans to Take Stakes in Private-Equity Firms

Competition for acquiring direct stakes in private-equity firms just got hotter.

Goldman Sachs Group Inc. has jumped into the business of buying minority interests in private-equity firms, joining other players in the fray, including Dyal Capital Partners LP, GP Interests LLC and Hycroft Capital LP.

The New York firm's Goldman Sachs Asset Management unit will initially make its plays out of Petershill II LP, a $1.5 billion pooled investment fund, said a person familiar with the matter. Since Fund II was raised in 2015 mainly to back midmarket hedge-fund managers, the firm is considering raising a new dedicated pool focused on taking stakes in private-equity firms and deploying $1.5 billion for the strategy, the person said.

Goldman aims to build a diversified portfolio of managers across sectors, strategies and geographies, the person said, adding that the firm will look at midmarket fund managers as well as larger ones.

GSAM's Alternative Investment & Manager Selection Group is known for backing hedge-fund managers. Its second fund, Petershill II, took a 10% stake in the $1.6 billion hedge-fund firm Fort Management LP in January, and has owned a minority stake in macro hedge-fund firm Caxton Associates LP since 2014.

The Petershill Fund LP—a 2007-vintage vehicle—has recorded a 15.5% annual cash yield since its inception, and has doubled its invested capital so far, the person said.

But it is widening its net to target private-equity managers and has been active in the space in the last six to 12 months, people familiar with the situation said.

GSAM already is active in private equity, investing in companies, private funds, co-investment and secondary opportunities since 2007. A person familiar with Goldman's thinking said it is a natural extension of the company's private-equity focus. Investors take minority stakes in private-equity managers to not only tap into a managers' cash flow, but also to forge closer ties and gain better visibility to its pipeline of future funds.

The broadening of Goldman's mandate comes as the line has blurred between private-equity firms and other alternative investment managers, with some private-equity firms branching out beyond traditional buyout activities or aiming to raise additional capital to tackle new areas such as credit, real assets and hedge funds to smooth out the lumpy nature of private-equity returns.

It also appears as hedge-fund managers have struggled for a variety of reasons: jittery stock markets amid tightening credit, the U.K.'s potential exit from the European Union, the surging Japanese yen and the coming U.S. presidential election.

Hedge Fund Research Inc.'s HFRI Fund Weighted Composite Index, a broad proxy for the hedge-fund universe, gained 0.33% in the first four months of the year, compared with the S&P 500 index's 1.73% gains. Barclays Capital Government/Credit Bond Index rose 4.15% for the period.

To be sure, Goldman isn't making a complete pivot.

The person said that even though hedge-fund managers are going through a rough patch, Goldman still is interested in owning stakes in hedge funds for their ability to swiftly scale their assets and believes that the strongest hedge-fund managers will benefit from the current industry shakeout.

Investing in private-equity managers, on the other hand, is comparatively stable as investors can't easily pull out capital from these funds. Still, it is usually harder for private-equity managers to scale their businesses because they are generally restricted from raising follow-on funds if they can't invest a certain proportion of capital from their current funds.

Goldman's competitor in the space, Neuberger Berman's Dyal Capital Partners, also shifted gears to focus on backing private-equity firms. Dyal raised two funds backing hedge-fund managers, and is now raising a third fund focused on private equity. The fund, Dyal Capital Partners III LP, has so far collected about $2.5 billion in investor pledges in what is expected to be one of the biggest evergreen funds created to take minority stakes in private-equity firms, people with knowledge of the matter told WSJ Pro Private Equity.

Dyal, which has stakes in technology-focused Vista Equity Partners and energy investor EnCap Investments LP, targets the industry's largest 50 to 100 private-equity firms, people familiar with the situation said.

Goldman said on its website its GSAM unit supervised $1.11 trillion of assets as of March 31, with $118 billion in alternative investments.

AIMS group is led by Chris Kojima, with Kent Clark overseeing its hedge-fund investments and Michael Brandmeyer its private-equity programs, including Petershill.

Dawn Lim contributed to this article.

Write to Amy Or at [e-mail]

(END) Dow Jones Newswires

May 24, 2016 14:05 ET (18:05 GMT)

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