South of the border, GP staking has moved from niche to mainstream, with the emergence of dedicated funds whose sole focus is acquiring GP stakes. That trend is starting to spill over into Canada, where a growing number of mature managers with strong track records are catching the eyes of U.S. GP stakes investors. But for Canadian sponsors looking for liquidity and/or a strategic partner, it's important not to overlook the potential GP partners in their very own backyard. While Canada doesn't yet have funds dedicated exclusively to GP stakes, it has no shortage of sophisticated investors, many of whom are already Canadian fund LPs who have long been recognized for their sophisticated approach to alternative investments.
Of course, the GP/LP partnership isn't a novel concept. There are a number of Canadian institutions that have acquired the opportunity to participate in GP economics and/or governance by virtue of being anchor fund LPs (typically referred to as GP seeding transactions, which provide early capital to emerging managers to help launch their platforms). These can take the form of GP ownership or other profit-sharing arrangements. However, as the Canadian private equity market continues to evolve, it may make sense for these investors to also consider making GP stakes investments—focused on acquiring minority, non-controlling interests in established alternative asset management firms—which is a distinct strategy from GP seeding (see our recent article outlining the differences).
One perceived hurdle for these investors is the regulatory frameworks in which some of them—be it banks, insurance companies or pension funds—operate, but with appropriate structuring, planning and execution, the opportunity can be realized.
Why the appeal for Canadian institutional investors?
A GP stakes investment offers the potential for stable, long-term returns and a stake in the growth of successful asset managers. For Canadian institutional investors, GP stakes investments offer several potential advantages:
- Long-term alignment. Many GP stake structures are perpetual or long-dated, which aligns naturally with the long investment horizons of certain institutional investors, including pension plans.
- Enhanced access to deals. Strategic relationships with GPs can increase priority access to co-investment opportunities, often at reduced fees.
- Portfolio diversification. Instead of investing in a single fund or asset, a GP stake provides exposure to the economics of managing capital across multiple funds and vintages, allowing investors to benefit from the broader private market ecosystem.
- Enhanced revenue. Participating in the GP's fee-related earnings can complement returns from traditional fund commitments, potentially enhancing the overall return profile.
Despite these advantages, institutional investors must take several key regulatory and structural considerations into account when pursuing GP stakes investments.
Canadian regulatory and structural considerations for pension plans and banks
In addition to assessing whether an opportunity is a "good investment", a Canadian pension plan must ensure it aligns with its governing statute and other governance documents (including any investment-only mandate), complies with pension investment rules and is structured to be tax efficient. Key considerations include:
- Prudent person rule and fiduciary duty. Depending on the structure, either the Canadian pension plan itself or its investment manager must act in the best financial interests of the plan's beneficiaries or the plan itself. GP stakes can be appropriate if they fit within the plan's risk/return objectives, are properly evaluated, and supported by thorough due diligence and governance processes.
- Ownership and control limits. GP stakes are typically structured as minority non-controlling interests, which can help address pension investment threshold restrictions and limitations on activities beyond investing. Look-through tests may still apply.
- Related party and conflict rules. Related-party transaction rules and conflicts of interest must be carefully managed when a Canadian pension plan invests in both a GP and the funds it manages.
- Liquidity constraints. GP stakes are typically illiquid long-term positions. Pension plans must be comfortable with the lack of an active secondary market, particularly if other parts of their private asset portfolios are already illiquid.
Similar to the considerations for pension plans to ensure the investment aligns with governing legislation and would be tax efficient, Canadian banks and insurance companies would also need to ensure compliance with the investment rules under the Bank Act and/or Insurance Companies Act (for example, if a bank/company would be acquiring a "substantial investment" it must be a permitted investment for the bank/company) and consider the capital implications of the proposed investment.
Risk management essentials
In considering these investments, best practices for Canadian institutions include:
- Robust due diligence: analyzing the GP's track record, fund economics, governance, succession planning, and key-person risk.
- Clear conflict policies: where an institution is both an LP in a fund and an investor in the GP that manages it, managing conflicts of interest and the fiduciary obligations of the sponsor to the LPs.
- Scenario analysis: modelling downside cases, including the impact of fee compression, fundraising slowdowns, or GP departures.
- Exit planning: even if the investment is intended to be long term, understanding secondary market options or buyback rights.
The bottom line
As some Canadian institutional investors scale back from competing head-on with private equity firms to acquire companies, GP stakes and similar asset-manager investments offer another way to drive returns. By partnering directly with the managers themselves, these entities can deepen strategic relationships, secure advantaged access to deals, and capture a share of the economics across a manager's entire platform. The model plays to the long-term horizons and relationship-driven approach that have made Canadian pension plans and other Canadian institutional investors global leaders in private markets.
The opportunity is real, but so are the governance and execution demands. Success will depend on disciplined diligence, thoughtful structuring and a clear fit with the institution's overall investment strategy.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
