E110: How Legacy Knight Scaled $1.5 Billion in Under 5 Years
Nov 8, 2024
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David Sawyer, Chief Operating Officer & Managing Partner at Legacy Knight, shares insights from his journey in the multi-family office sector. He discusses the common pitfalls investors encounter in GP stakes and explains why middle-market GP stakes are set to outpace traditional investments this year. David emphasizes the competitive edge smaller firms have in serving high-net-worth clients and explores the crucial role that investment bankers play in navigating GP stakes transactions. Dive into the evolving landscape of portfolio construction and the promising avenues for high-net-worth investors.
Legacy Knight successfully scaled to $1.5 billion in assets by focusing on personalized investment opportunities for family offices.
Investing in GP stakes offers a lucrative revenue stream through management fees, while providing downside protection and stability.
The increasing demand for alternative investments drives private equity managers to sell stakes for growth and operational expansion.
Deep dives
Growth and Structure of Legacy Nine
Legacy Nine is a multifamily office established in Texas in 2020, which has rapidly grown to manage nearly $1.5 billion in assets within a short span. The firm operates through two main segments: the legacy business focusing on comprehensive advisory services and the night side, which concentrates on curating investments in alternative spaces such as private equity and real estate. Legacy Nine primarily serves family offices, aiming to provide them with better access, fee structures, and investment opportunities compared to larger banks. By utilizing checks in the range of $20 million to $100 million, they seek to craft tailored investment solutions for each family office's unique needs.
Competitive Advantages Over Large Banks
Legacy Nine distinguishes itself from large financial institutions like JP Morgan and Goldman Sachs through its flexibility in navigating private markets and offering unique investment alternatives. Unlike traditional banks, which operate under significant regulatory restrictions and bureaucratic challenges, Legacy Nine can adapt quickly, allowing it to explore a wider array of investment opportunities for its clients. Families often prefer the nimbleness and personalized service provided by Legacy Nine, enabling tailored financial advice that fits their specific investment goals. This capability illustrates a crucial edge against the sprawling and often cumbersome structures of large banking entities.
Understanding GP Stakes Investing
GP stakes investing involves acquiring minority interests in private equity and private credit firms, usually less than 20%, which provides a steady revenue stream through management fees. This investment method has gained traction as it offers downside protection, thanks to the structured fee arrangements associated with long-term investment vehicles. Legacy Nine has recognized that investing in GP stakes not only secures capital but also plays a pivotal role in the growth strategy of the asset managers involved. As the demand for alternative investment strategies grows, GP stakes are becoming an increasingly attractive option in the finance landscape.
Key Drivers for GPs Selling Stakes
There are several primary motivations for private equity managers to sell a part of their stakes, including the need for business growth, operational expansion into new markets, and successful generational transfer of leadership. As firms grow, they often require additional capital for new funds or to support strategies that expand their operational scope, such as diversifying into credit wings. Additionally, the private equity sector is seeing many original founders reaching retirement age, necessitating succession plans that can involve external partners to ensure continuity and operational stability. These factors drive managers to seek strategic partnerships that facilitate both growth and successful transitions.
Evaluating Quality in GP Stakes Transactions
When assessing the quality of a GP stakes investment, several crucial factors come into play, including the strength of the underlying capital base and the historical performance of the management team. A stable, institutional LP base signifies a high probability of revenue from management fees, which forms a cornerstone of a sound investment strategy. Beyond financials, understanding a manager's capacity to raise additional funds and scale is essential to mitigate risks associated with fickle investor sentiment. Ultimately, the combination of a strong track record, an established network of quality LPs, and capital-raising capability creates a robust profile for potential GP stakes investments.
David Sawyer, Chief Operating Officer & Managing Partner at Legacy Knight : Multi-Family Office sits down with David Weisburd to discuss the top mistakes investors make in GP stakes, why middle-market GP stakes could be a game-changer for investors, and how GP stakes outperform traditional investments in 2024.
The 10X Capital Podcast now receives more than 170,000 downloads a month. Are you interested in sponsoring an episode? Please email me at David@10xcapital.com.
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SPONSOR:
Carta is the all-in-one suite for private fund operations. Carta’s software-based approach takes fund administration out of the spreadsheet and into the modern age with powerful solutions and intuitive interfaces, all on one platform. Their suite of products and expert services help funds at any stage with up-to-date insights and automated workflows to get them to the next level. Learn more at: https://z.carta.com/10xpod
Questions or topics you want us to discuss on The 10X Capital Podcast? Email us at david@10xcapital.com
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TIMESTAMPS:
(0:00) Episode Preview
(2:40) Understanding GP Stakes Investing
(4:46) Succession Planning with GP Stakes
(6:27) Evaluating GP Stakes Investments
(12:11) Revenue Streams in GP Stakes
(19:26) Sponsor: Carta
(20:34) Investor Mistakes and Valuation Metrics
(23:33) Middle Market GP Stakes: A Growing Landscape
(25:37) Emerging Trends in GP Solutions Funds
(26:41) Value Addition and Governance in GP Stakes
(29:26) Due Diligence Processes in GP Stakes
(32:58) Opportunities in Upper Middle Market Firms
(35:54) Attractive Asset Classes for GP Stakes
(38:23) New Entrants and Evolution in Portfolio Construction
(41:49) Closing remarks
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