Direct co-investment in private equity refers to the practice where large limited partners directly invest in companies and assets alongside private equity funds. It has emerged as an attractive option for LPs to gain more control, save costs, and access quality deals. This article provides key insights into direct co-investments in private equity.
Over 70% of LPs are interested in co-investing to pursue higher returns
According to a 2018 McKinsey survey, over 70% of LPs are interested in co-investing to pursue higher returns compared to investing in funds only. Studies by Preqin show that for LPs who have co-invested, 80% generated higher returns than merely investing in funds.
Co-investment allows LPs to save management fees and carry
Most GPs do not charge management fees and carry for co-investments by LPs. This helps LPs reduce investment costs significantly. According to HarbourVest research, LPs can save 53% in costs by co-investing compared to investing in funds.
Direct access to quality deals provides more certainty
Co-investment allows LPs direct access to quality deals in the PE fund’s pipeline. Unlike blind pool investment in funds, LPs know exactly what they are investing in with higher transparency. This enables better evaluation and pricing of assets.
However, co-investment poses challenges regarding deal sourcing and decision-making speed
For successful LP co-investment programs, sourcing high-quality deal flow remains a top challenge. LPs also need to act fast with investment decisions, often within 1-3 weeks, which requires special processes and regulatory approvals.
While direct co-investment in private equity offers benefits like higher returns and lower costs for limited partners, it also requires strong deal sourcing capabilities and quick decision-making mechanisms.