The Increasing Promise and Challenge of Private Equity Co-Investment

Co-Investment Grows

Clocking in at $47 billion in 2015, up from $8 billion in 2010, private equity co-investment has grown nearly six-fold in five years, according to Palico estimates. Last year, it was equal to approximately 10 percent of the $466 billion raised for commingled PE funds, up from just 4 percent in 2010. In co-investment, investors purchase stakes directly in portfolio companies, alongside PE managers, rather than through their commingled funds.

Co-Investment Performance versus Funds

*Responses from investors participating in Palico’s Summer 2016 Global Private Equity Compass

Why Co-Investment is Popular

Palico’s recently published Summer 2016 Global Private Equity Compass – contrasting the aggregated views of 106 investors and 179 managers – gets to the heart of co-investment’s appeal. Some nine out of 10 investors in Palico’s survey report that returns from their co-investments have matched or outperformed their private equity fund investments. More than two-fifths – a very significant proportion – state that their co-investments have done better than their fund investments, and just one in 10 say that their co-investments have done worse than their funds. But those results need to be put in perspective.

Co-Investment is Still Relatively Small Scale

Co-investing is still not that easy to do. Four out of five investors note in Palico’s survey that they exercise co-investment rights at best ‘occasionally’, with just 13 percent using them ‘very often’, and 6 percent employing them ‘always or almost always’. This lack of frequency demonstrates firstly that investors are selective when it comes to pulling the trigger on co-investment, and secondly that investors have an issue getting investment committee approvals for fast moving co-investment opportunities. If investors, encouraged by the returns of what remain relatively small co-investment programs, decide to expand those programs drastically, there is a real danger that the overall quality of their co-investment will deteriorate, leading to lower returns.

Many Investors Want to Expand Co-Investment

The possibility that investors will broaden their co-investment programs is more than hypothetical. A remarkable 56 percent of investors in Palico’s survey are shortening their investment decision-making processes, with three out of four explaining that they’re doing so in order to do more co-investment. Overall, 42 percent of all investors are looking to invest more through co-investment.

The Quality of Co-Investment Opportunities has Never Been Better

GPs Offering LPs Co-Investment

On the unambiguously positive side, the number of high quality opportunities has never been as great as it is now. Nearly nine out of 10 fund managers offer co-investment today. Among those managers in existence prior to 2011 who are currently offering co-investment, 42 percent only began their programs in the last five years, vastly expanding choice and quality.

Connecting on the Right Co-Investments

Co-investment will remain an attractive way for investors to dial up their overall private equity exposure. But successfully handling co-investment programs as they grow will be challenging. Palico’s marketplace of 3,000 classic fundraising, co-investment and secondary fund offerings helps investors find the best opportunities. It also connects fund managers to the right partners.


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