Co-investment deals see investors buying a direct stake in a company alongside a private equity fund. Co-investments have become prominent with institutional investors in recent years, due to the advantages they offer, including: lower annual management fees, the potential to gain higher returns, better relationships with GPs, the mitigation of the ‘J-curve’ phenomena, and the ability for an investor to gain greater control over its underlying assets. However, investors need to be aware that co-investments may 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 currently tracks 5,287 investors in the private equity asset class, 20% of which have stated a preference for co-investing alongside their fund managers. The most prevalent type of investor with an appetite for co-investments are private equity fund of funds managers, accounting for 19% of these LPs. Public pension funds account for 12% of investors. Private sector pension funds, insurance companies and investment companies each account for 7% of these LPs, followed by asset managers and endowment plans (6%).
Co-investments are prominent among North America-based investors, which account for 47% of all LPs that are interested in co-investment opportunities. Investors based in Europe make up 30% of the sample of LPs, and the remaining 23% comprises investors from across the globe which includes South America, Africa, Asia and various other regions.
An example of a North America-based public pension fund that is actively seeking co-investment opportunities with its fund managers during 2014 is Ohio Public Employees' Retirement System; the pension fund will look to build out a diversified co-investment program over the next 12 months. Another example is Teachers' Retirement System of the State of Illinois, who recently co-invested alongside three private equity fund managers.
In December 2013, Preqin surveyed over 100 institutional investors globally for its bi-annual Preqin Investor Outlook: Alternative Assets, H1 2014 report. It was found that 93% of investors surveyed cited that they expected to either increase or maintain their co-investment activity throughout 2014, showing that investors continue to see the benefits of co-investing and subsequently have an appetite to co-invest, despite the risks associated with these investments.