Co-investing, where large investors partner with others, is an increasingly popular investment approach. By pooling resources, co-investors can participate in deals they couldn’t access alone. However, successfully executing a co-investment strategy requires careful planning. Key factors include choosing compatible partners, establishing clear rights and responsibilities, aligning interests through governance and incentives, and mitigating risks through thorough due diligence. When done well, co-investing expands opportunities and enhances returns. This article will analyze best practices for co-investing, using real-world examples and drawing on the reference materials provided.
Align interests through governance and promote cooperation
Effective co-investment partnerships put governance structures in place that promote cooperation and shared priorities. This could involve forming a limited partnership where general partners lead decision-making. Partners might also establish a board with defined voting rights based on capital contributions. Regular meetings and transparent communications are critical. JAB Holding’s partnership model has aligned its interests with investors in its coffee platform, enabling joint value creation. Defined governance and aligned economic incentives unite partners behind strategic goals.
Conduct comprehensive due diligence to identify risks
Thorough due diligence is crucial when co-investing to uncover potential risks and determine fit. Investors should assess partners’ track records, investment thesis and philosophy, target returns, and risk tolerance. For deals, evaluating the business plan, management, valuation, debt levels, regulatory issues, and exit options is vital. JAB’s experience with Coty shows the perils of inadequate diligence. By contrast, its detailed diligence on Krispy Kreme enabled a successful investment.
Establish clear rights and responsibilities
Co-investors must agree upfront on responsibilities and decision-making authority. This includes investment sourcing, due diligence, deal execution, post-investment governance, and exits. Rules for information sharing, confidentiality, and reporting should be established. Partners should also agree on investment horizons, return targets, and approaches to distributions. Defined rights and duties reduce conflicts and facilitate cooperation, as evidenced by private equity co-investing practices.
Choose partners strategically based on compatibility
Vetting the compatibility and synergies of potential co-investors is crucial. Relevant factors include investment style, sector expertise, geographic scope, return expectations, strategic vision, culture, and temperament. Partners with complementary skills can expand opportunities. For example, PE funds may choose LPs with industry knowledge as co-investors. But divergent philosophies often undermine partnerships, as Coty’s struggles show.
Co-investing can unlock unique opportunities and magnify returns but requires aligned interests, governance, diligence, and strategic partner choices. When executed well, as with JAB’s coffee platform, co-investing succeeds. But without sound practices, partnerships flounder. Thorough planning and compatibility between partners drive effective co-investing.