Direct investments in private equity refer to when investors directly invest into private companies, rather than investing through a private equity fund. This allows investors to have more control and transparency over their investments. Over the past decade, direct investments in private equity have been growing, fueled by increasing demand from limited partners. In this article, we will provide an overview of direct investments in private equity, including the benefits and challenges, trends, and outlook.
Benefits of direct investments in private equity
The main benefits of direct investments in private equity include greater control and transparency, lower costs, ability to cherry-pick deals, and customization of deal terms. Since investors directly own a stake in the company, they can be more involved in governance and strategic decisions. They also have full visibility into the company’s operations and finances. Additionally, by avoiding private equity fund fees and carry, direct investments can achieve better returns. Investors can also be highly selective and only invest in the most attractive opportunities that match their criteria.
Challenges of direct investments in private equity
However, direct investing also comes with several challenges. Sourcing high-quality investment opportunities requires extensive networks and deal flow. Conducting due diligence and negotiations is resource-intensive. Portfolio construction and management capabilities need to be built in-house. There may be higher risks as investments are less diversified. Many limited partners lack the capabilities for direct investing, especially smaller investors with limited access to deals.
Trends in direct investments in private equity
Direct private equity investments have been growing rapidly, rising from $92 billion in 2011 to over $200 billion in recent years. An increasing number of limited partners now have dedicated teams focused on co-investments and direct deals. Particularly in Asia, direct investing is seen as a way to gain better access and value. Large pension funds and sovereign wealth funds have been the biggest drivers of this trend.
Outlook for direct investments in private equity
The outlook for direct investments remains strong going forward. As limited partners become more sophisticated and competition for private equity deals increases, direct investing is seen as a strategic tool for investors. More asset owners are expected to implement co-investment programs and explore single-asset partnerships. However, sourcing quality deal flow and building operations-ready investment teams will remain challenging. Partnerships with experienced fund managers can help mitigate these issues.
In summary, direct private equity investments allow for greater control, lower costs, and customization for investors. But they also require extensive capabilities and resources to source and manage deals. As limited partners increase their sophistication, direct and co-investments in private equity will likely continue growing over the long term.