Co-investments have become increasingly widespread among institutional investors in recent years because of the advantages they offer. Benefits include exposure to niche markets, low carry rates, the potential to gain higher returns and more control over the investment due to a closer relationship with the fund manager. However, co-investments may also result in an over-concentration of investment in a small number of companies and they do not always provide a high rate of return.
Preqin’s Investor Intelligence online service currently tracks 5,706 investors active in the private equity asset class, 17% of which are seeking to co-invest alongside their fund managers. The predominant investor type with an appetite for co-investment opportunities is private equity fund of funds managers, accounting for 20% of co-investing LPs. Public pension funds and family offices each represent 10% of co-investing investors, followed by insurance companies (7%), asset managers (6%), investment companies (6%) and private sector pension funds (5%).
North America-based investors account for 47% of all LPs that are interested in co-investment opportunities. Investors based in Europe make up 22% of LPs, with the remainder composed of investors from across the globe.
An example of a Europe-based public pension fund that is seeking to co-invest alongside its fund manager over the next 12 months is Lincolnshire County Council Pension Fund. The UK-based pension fund will look to commit to three co-investment opportunities over the coming year, working with existing managers in its portfolio as well as forming new GP relationships. New Jersey State Investment Council is an example of a North America-based pension fund that has recently co-invested alongside a fund manager in NJ/HitecVision Co-Investment Fund.
In December 2014, Preqin surveyed 100 institutional investors globally with an appetite for direct or co-investments; the majority (56%) stated they expected to increase their activity in this area throughout 2015. This shows that despite the risks, investors still have an appetite for co-investing alongside fund managers and clearly see the benefits.