Private equity co-investments, referring to limited partners directly investing alongside general partners in individual portfolio companies, have seen rapid growth in recent years. According to Preqin data, the aggregate value of private equity co-investments reached over $200 billion globally in 2021, more than triple the amount five years ago. This trend is expected to continue in 2023. There are multiple driving factors behind the private equity co investment boom.
Need for additional capital and returns enhancement
As private equity funds seek higher returns in a competitive environment, they have tapped co-investors to invest more capital into deals while keeping fund sizes reasonable. On the investor side, co-investments provide access to deals they otherwise won’t be able to access, and the potential for higher net returns compared to just investing into the funds themselves.
Greater acceptance of co-investments
In the past, some limited partners viewed co-investments as risky and operationally demanding. But recently institutional investors have become more comfortable with co-investments, with many building up internal teams to source and evaluate such opportunities. Large LPs including Canada Pension Plan Investment Board and Teacher Retirement System of Texas are actively looking to deploy billions into co-investments.
Rise of seperate managed accounts (SMAs)
SMAs are bespoke investment vehicles set up by private equity firms to facilitate co-investments alongside their main funds. They provide a structure for investors to commit capital to co-investments upfront without having to evaluate each deal. SMAs can also help align incentives between LPs and GPs. According to Preqin, private equity firms raised over $230 billion for SMAs in 2021, over seven times the amount five years prior.
Multiple factors have driven rapid growth in private equity co-investments, including need for additional capital, greater acceptance by LPs, and rise of seperate managed accounts. This trend is expected to continue in 2023 with co-investment values likely reaching new highs.