Co-investing alongside fund managers is an attractive investment strategy for LPs that are prepared to take on the additional risk for potentially higher returns, more transparency and increased control over their investments. It has proven particularly appealing for those investors that are able to commit larger amount of capital, as well as those LPs with adequate resources and the necessary infrastructure to oversee this type of investment.
Preqin recently interviewed a sample of 118 investors with an interest in co-investments in order to establish their future intentions for co-investing alongside fund managers.
Our study shows that the majority (65%) of LPs interested in the space anticipate increasing their allocations to co-investments going forward. One Swiss LP, for instance, that expects to step up its exposure to co-investments alongside its fund managers commented: “People have become disillusioned about fund investments as fund sizes are getting smaller. We want to make as many co-investments as we can with existing managers.”
Twenty-six percent of respondents are satisfied with their level of exposure to co-investments and anticipate maintaining it in the future, while a much smaller proportion, 9% of respondents, indicated they will decrease their allocations to co-investments going forward.
A significant three-quarters of LPs we spoke to are asking GPs for co-investment rights when making new fund commitments – and they usually receive them. A Middle East-based investment company commented: “Private equity changed recently and GPs are more willing to offer LPs co-investment rights,” while one German investor stated that “those who commit to a fund before the first-close can get more favourable co-investment terms,” suggesting that more fund managers are willing to offer co-investment rights to investors in order to secure commitments in this difficult market.
A quarter (25%) of LPs we spoke to do not ask for co-investment rights in the new funds they are investing in and instead prefer GPs to approach them with such opportunities.
Preqin currently tracks over 4,800 investors in private equity funds, including detailed information on over 700 LPs with an appetite for co-investments. Fund of funds managers constitute the largest proportion co-investors of (23%), while public pension funds make up another 10% of the universe. Asset managers, private sector pension funds, insurance companies, and banks and investment banks each constitute 7% of LPs with an appetite for co-investments.