This article first appeared in Term Sheet, Fortune’s newsletter on deals and dealmakers. Sign up here.
Fortune has been chronicling the proliferation of spin-off firms launched by junior partners, but that trend is not limited to venture capital. The same thing is coming to private equity. Nothing is concrete yet, but I’m hearing junior partners at a handful of buyout firms are initiating talks with LPs to open their own shops.
The trend coincides with buyout firms selling stakes in their management companies. In recent months, for example, TSG Consumer Partners sold a minority stake to funds backed by Kuwait and The Riverside Company sold a minority stake to Parkwood LLC. Last year Littlejohn & Co. sold a minority stake to Goldman Sachs. And last year Goldman raised a $1.5 billion fund for these kinds of deals. (Again, there’s nothing concrete to report yet, so these are just examples of the minority stake trend.)
Junior partners — my shorthand for anyone not named on the Form ADV — are not usually involved in these discussions. They may have decision-making power on deals, but they don’t have a say in what happens to the firm, or on who makes money on a minority stake sale. Most notably, the non-compete clauses are normally limited to the partners named on the ADV.
In some cases, I’m told, junior partners are frustrated that outside investors get access to the fee stream ahead of them. As one observer noted, “It is a struggle between single digit millionaires and the founders who may be worth, on paper, hundreds of millions.”
Meanwhile, limited partners are wary of any potential tension created by management stake sales – they’d rather a firm incentivize its junior partners to stay. The result is that some savvy LPs are targeting junior partners at firms that have sold minority stakes and offering to be an anchor investor in a new fund. “They see an opening when the junior partners who didn’t get any money and didn’t have to sign a non-compete in the minority stake sale are now tired of being left behind,” one source said. We’ll be watching to see how this trend develops.