April 2015

Weighing the Co-Investing Question

Research Confirms that Co-Investing Alongside Fund Managers Has the Potential to Enhance Returns for Institutional Investors; But the Current Popularity Actually Makes it Harder to Do it Right, Says Cambridge Associates

BOSTON, MA (April 14, 2015) — The popularity of and buzz around co-investment strategies, in which investors invest directly into portfolio companies alongside a private equity fund at the invitation of a fund manager, is mounting.

Investors (limited partners) are attracted to the potential to increase private investment exposure, and returns, at a lower cost. And managers (general partners) are motivated by a range of factors, including the desire to share opportunities with LPs rather than competing GPs.

But are co-investments really worth it? “We’ve seen a lot of theoretical support for – and dismissal of – co-investing as a strategy, and we wanted to explore some of those claims,” says Andrea Auerbach, Managing Director and Global Head of Private Investment Research at global institutional investment advisor Cambridge Associates. She is co-author of Making Waves: The Cresting Co-Investment Opportunity.

As part of the research, Cambridge analyzed over 100 buyout co-investments, and nearly half outperformed the sponsoring GP’s fund. And buyout-focused co-investment fund portfolios outperformed global buyout funds in seven out of 10 vintage years. (According to Cambridge estimates, LP co-investment activity accounts for upwards of 5% of overall private investment activity.)

“Make no mistake. Co-investment returns have the potential to outperform private fund investment returns and provide alpha. However, co-investing does not guarantee private equity return enhancement. Not every individual co-investment will outperform, and therein lies the rub. Implementing a co-investing program requires careful planning and discipline in order to execute at what is a higher degree of difficulty for private investing,” said Auerbach.

Among the various co-investment challenges are timing and investor behavior, assessing the GP’s stated strategy, and developing an infrastructure for the co-investing program.

Investor Behavior: Effective Co-Investing May Mean Waiting for Its Popularity to Subside

Historically, a good time to co-invest may be a slower or more volatile market when a GP fund has limitations and there is less competition for deals. That environment typically translates to lower purchase prices for companies. Notably, co-investments outperformed buyout funds the most in the early 2000s and in 2009, times when overall buyout and co-investment volumes were low.

In today’s environment, GPs are raising larger funds and there’s increasing competition for deals. The implications for valuations (and the kinds of co-investment deals GPs may offer up) increase the degree of difficulty for effective co-investment in the current market, according to the report.

“When co-investment activity is booming and distributions are high, it can be tempting for LPs to double down on co-investing. Actually, those market factors indicate a time to be cautious. It may pay off to stay on the sidelines and maintain some liquidity until entry valuations are lower and there’s less competition for deals,” said Auerbach.

Assessing the GP’s “Strike Zone” for Co-Investments

The report drives home that successful co-investing also means being vigilant about assessing whether the co-investment opportunity offered by the GP actually fits its “strike zone” – i.e., whether it falls within the strategy, size and skill set the manager is known for. Cambridge research shows that strike zone co-investments delivered a 1.65 total value multiple on invested capital, while non-strike zone deals delivered a 1.02 multiple.

Developing an Infrastructure for Careful Implementation of a Co-Investment Strategy

“Co-investing is not as ‘low impact’ an activity as it may initially seem. It requires more active management in implementation than fund investing,” said Auerbach. A co-investment strategy requires industry knowledge that is different from fund selection expertise; a process to facilitate timely investment decisions; and the ability to do proper due diligence on both the GPs and the deals. Further, investors need to assess their overall program’s risk appetite for directly held single company private investments – and to be prepared to possibly make follow-on investments in deals, as the companies they’ve invested in may need additional capital to navigate a rough period or unforeseen operating challenge.

“The bottom line is that co-investing can generate higher returns with lower fees, but only with a substantial investment of resources and discipline.” said Auerbach.

For a copy of the report, “Making Waves: The Cresting Co-Investment Opportunity,” please visit To arrange for a conversation with the author, please contact Frank Lentini, Sommerfield Communications at (212) 255-8386 /

This release is provided for informational purposes only. The information presented is not intended to be investment advice. Any references to specific investments are for illustrative purposes only. The information herein does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. This release is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction. Past performance is not indicative of future performance.

About Cambridge Associates

Founded in 1973, Cambridge Associates is a provider of independent investment advice and research to institutional investors and private clients worldwide. Today the firm serves over 1,000 global investors and delivers a range of services, including investment advisory, outsourced investment solutions, research and tools (Research Navigator and Benchmark Calculator), and performance monitoring, across asset classes. Cambridge Associates has more than 1,100 employees serving its client base globally and maintains offices in Arlington, VA; Boston; Dallas; Menlo Park, CA; London; Singapore; Sydney; and Beijing. Cambridge Associates consists of five global investment consulting affiliates that are all under common ownership and control. For more information about Cambridge Associates, please visit