Case Study Questions – GSA How does Grove Street Advisors propose to create value for its investors? Are these arguments plausible? Grove Street Advisors propose to create value for its investors by using the funds-of-funds approach to manage customized private equity portfolio of funds for its clients. The company addresses specific needs of customers through a customized approach of managing funds and provides them with access to exclusive funds. Grove Street Advisors proposed to use funds-of-funds to aggregate many small investments in order to solve the problem of diversification because investors can just contribute a small amount of funds which is then spread across different firms using the fund-of-fund approach (Rhodes-Kropf and Leamon, 2010). Fund-of-funds also uses its expertise to collect information about multiple private equity funds available.
It also allowed investors to have access to private equity organisations of high quality. Fund-of-fund is used to manage a large amount of money and channel it to different firms. It may also be used to handle everyday details of private equity organisations including monitoring and reporting. Another way that Grove Street Advisors propose to create value for investors is by providing customized funds tailored to the needs of clients.
For instance, larger clients can be provided with private equity program support so that GSA can manage part of the programs which may be inefficient for the clients or investors to do. Factors such as scale, geography, or sector make it difficult for investors to do some parts of private equity program or investment. GSA may handle the entire program for its small clients in order to create value for them. GSA also allocates funds by sector, geography, and year in order to create a good program vision for its investors (Rhodes-Kropf and Leamon, 2010).
GSA invests in a particular fund on behalf of its clients based on their needs and the existing fund relationships. 2. Why would private equity firms be interested in having GSA as a potential investor? Private equity funds would be interested in having GSA as a potential investor because it would connect them to customers. GSA allocates funds through program visions and funds-to-funds vehicles. GSA has the willingness to transfer its relationship with the private equity firm to the client over time.
This takes different approaches that allow the private equity firm to access a wide range of clients. According to the Grove Street Advisors, its clients are the clients of private equity firms. As a result, private equity firms can be interested in having Grove Street Advisors as a potential investor because it links them to its customers. First, uses a client’s account to invest in a good fund which allows private equity firms to know GSA’s clients through the GSA (Rhodes-Kropf and Leamon, 2010).
In this case, the fund generated by Grove Street Advisors comes from the account of its clients. These funds are to be used by the private equity fund; hence the private equity firm will know and acquire GSA’s clients through the fund established by the GSA. Secondly, if the private equity firm raises another fund, Grove Street Advisors may use the funds of its clients and allow the client to invest in its own money alongside GSA (Rhodes-Kropf and Leamon, 2010). This allowed the private equity firm to know the client more.
This essentially means that the Grove Street Advisors acts as an intermediary to link its clients with private equity investors. The entire money to be invested may also come from the client, which is then used to create a core portfolio. The private equity investor can benefit by getting access directly to the funds provided by GSA’s client with GSA benefiting from it because it does not receive compensation in this stage. 3. What do you think of GSA’s willingness to let its clients bypass them and invest directly in the fund managers located by GSA? Grove Street Advisors is willing to let its clients bypass them and invest directly in the fund managers located by GSA.
This benefits private equity firms more than the GSA. In this case, the relationship is transferred to the clients of Grove Street Advisors. This allows small clients who do not wish to manage their private equity portfolios to avoid contributing to the funds pooled by the Grove Street Advisors. This does not look beneficial to the GSA because the Grove Street Advisors does not get any compensation through the process.
However, the company can act as an intermediary through which clients can develop relationships with large investors. Allowing clients to bypass them invest directly in the fund managers enables GSA to add value to both LP and GP in the relationship despite not receiving compensation. In this regard, it is plausible for Grove Street Advisors to allow its clients to bypass them and engage directly with fund managers because as the clients becomes able to invest directly due to increasing GP, it no longer adds a lot of value for GSA to be engaged (Rhodes-Kropf and Leamon, 2010).
Therefore, GSA gets out of the way at this point. This decision by GSA also allows for the continuity of a long-cycle business whereby larger clients stay fresh as clients renew their justification to work with GSA. The main purpose of Grove Street Advisors in its business is to add value to clients by providing funds and managing clients’ funds as they invest. However, if the company does not achieve this value addition, there is no need to continue with the relationship.
Instead, it becomes correct to pass the relationship from the fund manager to the client so that the client can decide how to invest his money. 4. How should GSA proceed? As the business grows, Grove Street Advisors should proceed by identifying specific private equity firms that can match specific funding requirements of its clients. In order to achieve this, the company should categorise its clients according to the amount of funds that they can raise. Clients with small funds can then be linked to the private equity firms that require small amount of funds. Going forward, GSA should also enhance uniformity among its clients.
This can be achieved by allowing all clients to contribute the amount of funds they can afford and then bringing in other investors and partners to bridge the gap between the least contributors and the largest contributors. This ensures that both small and big clients contribute towards the compensation of GSA regardless of whether they can engage directly with the fund managers or not. It will also bring equality and efficiency in resource allocation in the financial market and the economy in general. References list Rhodes-Kropf, M.
and Leamon, A. 2010. Grove Street Advisors: September 2009. Harvard: Harvard Business School.