Last week I wrote about a hot trade on Wall Street right now, in which investment firms buy and sell pieces of each other: “A short history of modern finance is that someone invents a financial product — a mortgage, for example. Then someone else has the idea to bundle lots of mortgages and slice the resulting bundle into pieces and sell them individually.” In the mortgage example, loans get bundled into a mortgage bond and then sliced into tranches with different repayment setups. In the private-equity trade, firms get sliced first into “GP stakes” and then bundled into a fund. The result is something like Blue Owl’s GP Stakes Fund III, which offers investors exposure to multiple private-equity firms including Vista and Silver Lake. As far as investment innovations go, this one seems useful. But here’s the hard part: Those investors will eventually want their money back, and Blue Owl’s options are pretty limited. It could wait for Vista and Silver Lake to go public, but IPOs in this space are the exception. (There are thousands of private-equity firms, and only a dozen or so are listed on an exchange.) It could stall for time by borrowing money to give back, but investors hate that. It could slice that bundle into still-smaller slices, call them shares of stock, and sell them to the public in an IPO. Blue Owl has thought about doing this. A rival firm, Petershill Partners, actually did, to dismal results. Public investors don’t know what to make of a grab bag of opaque and illiquid investments. But private-market investors do. That’s their entire business. And so Blue Owl is selling some of the fund to them, then using the money to pay back the original investors. The new investors, which an industry trade pub referred to as “yield oriented long-term investors” (read: insurance companies) will now own a slice of a bundle of slices of private-equity firms. With enough of those new slices, the whole process can start over again. It’s a near-perfect financial carousel. | 
