Private equity co-investments have become increasingly popular in recent years as a way for investors to gain access to private equity returns. Co-investing allows investors to partner with experienced private equity firms on individual deals while paying lower fees compared to traditional private equity funds. As we move into 2023, what are the key trends and outlooks for private equity co-investments? This article will explore the opportunities and challenges private equity investors should be aware of when considering co-investments in the year ahead.
Growing appetite for co-investments
One major trend is the continued strong interest in co-investments from both existing and new investors. The ability to invest directly into companies alongside proven private equity managers is appealing to many institutions and high net worth individuals. According to Preqin data, around 70% of investors plan to maintain or increase their co-investment activity in 2023. The flexible and lower cost nature of co-investments is attractive for investors looking to increase their private equity allocation.
Strategic partnerships become key
With the competitive landscape, having strong relationships with general partners is becoming increasingly crucial for successful co-investment programs. Investors able to strategically align with top-tier GPs through long-term partnerships and commitment will have an advantage accessing the most sought after deals. Building strategic relationships early and demonstrating value-add beyond capital will be key differentiators.
Due diligence and portfolio fit paramount
Thorough due diligence will remain critical for co-investment opportunities, as investors take on deal-level risk rather than relying on a fund manager’s portfolio. Analyzing the merits of each investment and ensuring it fits within overall investment objectives and risk parameters is key. Investors without the necessary skills and bandwidth to conduct proper due diligence on deals may struggle to have a successful program.
Avoiding overcrowding
With the heightened interest in co-investing, overcrowded deals is an issue to watch out for. Having too many co-investors can diminish returns and influence over investment decisions. Maintaining discipline and only co-investing selectively in deals that are well-aligned will be an important priority. Overcommitting to co-investments in search of higher returns can be counterproductive.
In 2023, private equity co-investing will continue to gain traction among investors seeking alternatives to traditional fund investing. Success will depend on strategic partnerships, rigorous due diligence, portfolio fit and avoiding overcrowding. Disciplined investors able to leverage their relationships and expertise through co-investments stand to benefit.