Overviews and Guides

An Overview of Fund Seeders and GP Stakes Investors

We've launched new lists covering seeders and GP stakes investors supporting hedge funds, private equity firms and long-only managers. Here's an overview of the space and our lists.

By Ed Rowley, January 2024

I’ve recently posted new lists and summary profiles covering fund seeders and GP stakes investors.

These organizations invest strategic capital in hedge funds, private equity firms and long-only managers. Most also provide guidance to help managers develop their funds and businesses.

Below is an overview and explanation of the sector. To view the lists and profiles of seeders and GP stakes investors, click here.

Terminology

First, some clarification on terminology.

"Seeding" typically means making a significant investment in a manager’s fund for a committed period of time. The seeder receives returns from the fund investment, plus economics in the fund manager, such as a percentage of revenue. Under this structure, the seeder is not an owner of the manager itself.

Seeding is often done to support the launch of a new fund. When it supports an existing fund, it’s called "acceleration capital."

"Anchor investments" are similar to seeding, as they are substantial, early investments in a fund. However, an anchor investor usually receives a fee break, not manager economics.

"Emerging manager programs" invest in newer, smaller or MWBE managers. They are often run or supported by public pensions. Investments are normally made as a regular investment in a manager’s fund, or as an anchor investment in return for a fee break.

"GP stakes investing" involves acquiring a minority equity interest in the management entity (GP). Like a seeder, a GP stakes investor shares in the fund manager's economics. However, unlike a seeder, a GP stakes investor is an owner of the manager.

There are also multi-boutique managers, which establish strategic relationships with managers and then distribute their funds as part of a product lineup. These strategic relationships may take the form of seeding or GP stakes deals.

The above definitions are based on how I’ve generally seen these terms being used by industry participants. However, since there are no official definitions, the terms are sometimes used in overlapping ways, with some blurring of lines between anchoring and seeding, and seeding and GP stakes.

What the Lists Cover

The lists cover dozens of organizations that publicly disclose dedicated efforts related to fund seeding (investing in a fund and receiving manager economics) and GP stakes (purchasing a minority interest in the manager).

I’ve classified organizations as seeders and/or GP stakes investors based on how the activities they describe match the definitions in the section above.

I’ve also segmented organizations by the types of managers they support – hedge funds, long-only, and private equity. (Note that the private equity sub-list covers other private markets strategies such as venture capital.)

The lists don’t cover anchor investors. Any sizeable investor can become an anchor by committing early in return for a fee break, whereas seeding or GP stakes investing requires a specialized approach.

The lists also don’t include emerging manager programs, unless they disclose a seeding component. Multi-boutique managers aren’t currently listed either. These areas will be the subject of future lists.

Many organizations that do fund seeding and GP stakes investing are investment managers that raise and manage funds dedicated to these activities. As a result, the amount of capital they can deploy at any point in time (from a lot, to none) depends on the status of their funds.

Some family offices or institutional investors may have the latitude to do the occasional seeding or GP stakes deal. However they would only be listed if they publicly disclose a dedicated effort in the space.

Note that while my goal is to have comprehensive lists, I will have missed some seeders and GP stakes investors. I will continue to add additional names when I find them.

Why Fund Managers Target Seed Capital

A seed investment in a new (or newer) manager’s fund will boost the manager’s AUM. This helps the fund fully deploy its investment strategy and launch.

Importantly, by increasing a fund's AUM, a seed investment opens up opportunities to raise capital from larger investors that won't consider funds below a certain size.

Seed investors also pay fees as an investor in the fund. Therefore a seed deal may be revenue positive when a manager is smaller, providing capital to build out the team and operations.

For established managers, a seed deal can provide acceleration capital to get a fund to critical mass. Or an established manager may want to launch a new fund or strategy, but needs an investor to back it.

Seeding is often associated with hedge fund backers, but the structure is used across fund types and strategies.

Why Fund Managers Target GP Stakes

There are a number of reasons why investment managers may wish to sell a minority interest to a GP stakes investor.

Established managers might need an investor to buy out departing owners. Or, as managers compete on scale, they need capital to make an acquisition, build out their infrastructure, launch a new strategy or bring in a new team.

For private equity or other private markets strategies, launching a fund can require significant upfront capital. The manager may need to make a GP commitment to the fund. It also might need capital to build out the team and infrastructure. GP stakes investors help managers cover these commitments and expenses.

Note that firms that acquire minority interests across manager types tend to describe their activities as partnering with firms, providing strategic capital, or acquiring minority interests. The term “GP stakes” is more frequently used by firms that focus on minority interests in private equity managers.

Other Considerations

Most seed and GP stakes investors provide guidance on best practices and strategic decisions related to building a fund management business. Some also assist with distribution and make investor introductions. These can be valuable services to a manager trying to make it to the next level.

Some strategic investors provide a combination of fund seeding and GP stake investments, or offer additional financial support such as working capital loans. The structures used also vary. For example, fund seeders may have different ways of approaching lockups and buyout provisions.

The space and its participants are constantly evolving. In the 2000s, hedge fund backers providing seed capital was a growing area. In more recent years, GP stakes investing in private equity managers has seen an uptick in activity.

The industry is a mix of some long-established seeding and GP stakes firms, along with newer entrants. I'll continue to update the seeding and GP stakes lists as I find new names and become aware of changes. You can view the lists and profiles here.

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