GP M&A – some pitfalls to avoid

Amid a tepid deal market, GP M&A activity stands out as a record-breaking exception. For example BlackRock’s headline making acquisitions of Global Infrastructure Partners and HPS Investment Partners.

These deals are part of a broader shift, asset managers looking to pivot to high-margin private markets investment or, in the case of mergers between two alternatives managers, GPs gaining scale and sector diversification.

While these transactions can be transformative for both parties, they also introduce significant risks.

Here are some challenges I’ve encountered when working with CFOs and Heads of Tax who are going through mergers, along with practical solutions.

Pay Disparities

Pay stagnation in traditional asset management has created stark discrepancies between experienced asset management professionals and their counterparts in alternative fund managers. These disparities can lead to tension and turnover during team integrations.

Solution: Separate Teams Under a Joint Head

This avoids immediate conflicts but sacrifices efficiency gains from integration. Note that the overall head will likely require a pay adjustment to align with their new responsibilities.

Solution: Segment Roles Functionally

Identify which roles at the alternative manager actually require premium compensation (e.g. specialised deal support) and merge the other routine functions into the broader group, while maintaining a smaller, clearly defined private markets team.

Cultural Disparities

Mergers between less institutional family offices and blue-chip alternative managers often lead to clashes. Family offices typically operate with leaner teams and lower adviser budgets, which may not align with the expectations of institutional investors like pension funds and endowments.

Solution

Family offices must understand that higher costs are often necessary to meet the demands of institutional LPs, who expect rigorous risk management processes and reporting. There may be some post-merger cost savings, but leaders must also be prepared to invest in meeting these higher standards.

Operating Model Disparities

Some firms have a culture of insourcing and others of outsourcing. As I’ve written elsewhere, within certain limits, either can work well. What doesn’t work well is trying to run both strategies at the same time. 

Solution

Understandably the leaderships of alternative managers have a bias towards the more profitable route, and that normally means outsourcing, as many outsourced costs are charged to the funds.  

However, this transition must be carefully planned and gradual in order to capture institutional knowledge from insourced teams and formalise it into defined processes.

Advisers to heavily in-sourced teams need to be brought into the process and given time to adapt to the new model. They will have a weaker understanding of their clients and will be used to executing defined tasks within fixed budgets, rather than “thinking around corners”.

Conclusion

None of these issues should derail a deal, but they require careful planning to avoid the merger reducing the quality of risk management at the combined business. If you would like help planning for or implementing a merger, feel free to get in touch—I’d be happy to help.