Our Insights

March 2015

Making Waves: The Cresting Co-Investment Opportunity

Andrea Auerbach, Priya Pradhan

  • Co-investing is gaining popularity and theoretically offers investors cost advantages and higher return potential. This report frames the opportunities and common pitfalls of co-investing, leveraging our aggregated data on co-investments and funds generating co-investment.
  • Our analysis shows that co-investment returns have the potential to outpace private fund investment returns. Of over 100 buyout co-investments analyzed in one exercise for this report, nearly half outpaced the sponsoring GP’s fund. Furthermore, investments by buyout-focused co-investment funds, analyzed on a gross basis to reflect the lighter fee load of direct co-investing, outperformed the net global buyout index in seven out of the ten vintage years examined. Of course, not every individual co-investment outperforms, and therein lies the rub.
  • Implementation is trickier than it may seem at first glance. A direct approach affords investors the most control, but also entails the most risk. To enhance the probability of success, investors that choose to pursue a direct co-investment program should:
    • Think carefully about program goals, set realistic expectations, and factor in existing (and potential) co-investment exposure via funds-of-funds.
    • Establish internal processes to facilitate timely investment decisions as well as effective investment monitoring and performance measurement.
    • Prepare and identify necessary resources.
    • Work with internal or external professionals with direct investment experience—co-investing is not as passive as it may appear.
    • Invest with GPs on which they have done due diligence and in which they have conviction—investors will likely need to rely heavily on the GPs due diligence.
    • Focus on investments within each GP’s stated strategy, or “strike zone,” to avoid adverse selection.
    • Not ignore the macro. Investors should be extra careful in frothy pricing environments and monitor opportunities for indications of procyclicality.