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.