Armen readying second GP stakes deal

‘There is a lot of pipeline, but it takes time for LPs to get comfortable with a new strategy,’ says CEO Laurent Benard.

Renaud Tourmente and Laurent Benard of Armen
Renaud Tourmente and Laurent Benard of Armen

GP stakes firm Armen expects to announce its second investment by the end of January, CEO Laurent Benard and deputy CEO and COO Renaud Tourmente told PE Hub Europe, as European interest in the strategy picks up.

“There is a lot of pipeline, but it takes time for LPs to get comfortable with a new strategy,” said Benard. “If you are in the US, it’s much easier because you have more than 100 transactions in the past, so everyone is aware of what GP staking is. It’s like a traditional private equity allocation.”

But as Armen tours European LP offices, investors from family offices to institutional investors have become interested, said Tourmente. First because of the gross cash yield of the business model, which corresponds to what LPs seek in private debt or infra funds, he said. The strategy also offers “strong diversification” because of the numerous underlying companies, akin to what secondaries funds can offer. Lastly, the strategy offers asymmetric risk, with “good downside protection and a strong upside scenario”.

“You have visibility and recurring management fees on AUMs and the ability to increase that and to develop the company further with us as a minority shareholder,” said Tourmente.

While lagging the US, European GP stakes have been “increasing sharply” over the last three to four years, said Benard. Armen’s first GP stake was a minority investment in independent French investment company RGreen Invest in April, in line with the firm’s lower-mid-market strategy. Other deals in 2023 included GP stakes in larger European-headquartered GPs, including Owel Capital’s Dyal Capital investing in PAI Partners and Hunter Point Capital investing in Inflexion and in Coller Capital.

Those deals came despite a difficult year for dealmaking, with debt expensive as central banks upped interest rates to heights last seen before the global financial crisis in 2008 and a valuation mismatch between buyers and sellers.

While inflation has dropped and markets are pricing in rate cuts for 2024, Tourmente still expects conditions to be difficult. “But it’s an interesting opportunity because usually in private equity, when you invest in difficult market conditions it turns out to be a good vintage,” he said. “This is true for us and this is true for the GPs in which we invest at the portfolio level.”

Pricing shift

Valuations will also have to settle for more deals to come.

“We have to expect a decrease in the EBITDA multiple,” said Benard. “It always takes time before you get to the right entry point. It’s a double effect. First they have to understand what GP stake is, then they have to reset the calculator to the right price for a potential transaction.”

Armen’s job has also been to explain how GP stakes can benefit the sponsors.

“In the GP stakes business model you create value by building a platform or by building up specialised players that have true expertise,” said Tourmente. “You need to build up this platform and shift them from sometimes mono-strategy or mono-country to multi-strategy and multi-country. Doing so increases the value of the platform and the value proposition.”

“People are understanding that critical size is getting more and more important,” added Benard. “When you have a crisis you can’t raise capital if you have a single strategy. It becomes difficult to project yourself in the long term.”

Growth plans

Armen has been focusing on growing its visibility, having met with more than 180 GPs, adding to its headcount in Germany and in North America (the company also has offices in Paris and London), looking at hiring in Singapore, holding a first close and hitting midway in terms of fundraising.

The firm also made a strategic move by acquiring Private Corner – “the leading player in the retail space for alternative funds”, according to Benard – in May. Armen president Dominique Gaillard talked PE Hub Europe through the rationale for the deal at the time.

“The environment is bringing a lot of opportunities,” said Benard. “We are doing something new and it’s very exciting. You become the name for GP stakes: for the lower-mid-cap it’s Armen.”

That sector has had less attention than large cap, where there are fewer targets and many GP stakes firms, said Benard. “Where we are, it’s a playground where you have a lot of opportunities but we have to take the time to discuss. These guys are much smaller so they can’t push a button and get full analysis. You have to explain to the managing partner and negotiate. It’s much longer than a private equity process. But that’s not a problem – this is where you get better price.”

The mid-market portfolio companies themselves are performing well, he added, other than sectors hit particularly hard by inflation and other macro factors. Raising capital becoming harder thanks to the lack of liquidity, extending duration slightly.

In these conditions, GP stakes firms need to focus on human capital, said Tourmente. There’s a quest for meaning, not just in in GPs, but in the portfolio companies that you need to address.” Digitalisation is another big trend, “making sure the platform is robust and setting up the right system to serve the human capital and the people in charge of those companies”.