Infrastructure co-investments can be an attractive option for infrastructure investors looking for an alternative route to market to infrastructure funds. Preqin is currently tracking over 1,700 active investors in infrastructure, of which 11% are open to co-investing, with a further 3% considering the strategy.
Co-investments have the potential for higher returns, stemming from exposure to preferable assets within a fund portfolio. However, these opportunities and any profitable revenue streams are often only made available to LPs with strong GP relationships. Co-investments also allow LPs to strengthen their knowledge of the deals process which can be beneficial for investors looking into a possible direct investment strategy.
Co-investments offer a route for LPs to gain direct exposure to assets they could not otherwise access, for reasons including a lack of experience in the asset class or a lack of capital resources. Co-investments also provide GPs with a source of additional capital which can allow for a reduction in the amount of a fund’s capital deployed to a single investment opportunity. Public sector pension funds account for the largest proportion of the infrastructure co-investor universe (18%) and private sector pension funds make up a further 7%. Insurance companies also account for a substantial proportion (13%), as well as assets managers (9%) and banks (7%). In terms of location, 33% of LPs with an appetite for co-investments are based in North America, 31% in Western Europe, 9% in both Asia and Nordic countries, and 6% in Australasia. The average target allocation to infrastructure of LPs with an appetite for co-investments is 8%. This compares to 15% for those making direct investments, and 5% for LPs investing only in unlisted infrastructure funds.
These figures indicate that co-investments can be an attractive alternative for LPs that may not have the resources required to make direct investments, but are looking for greater direct exposure, as well as the potential to bypass management fees and carried interest. It also seems to be an appealing option for large investors seeking increased exposure to infrastructure such as pension funds and insurance companies, which may lack experience in the management of infrastructure assets, and cannot afford to establish a team specifically for this purpose. However, the need for strong GP/LP relationships in order to create a healthy co-investment partnership means that co-investment opportunities may be beyond the reach of smaller newcomers to the asset class.