Private equity co-investments refer to investors directly investing in companies alongside private equity funds. Co-investments in private equity are gaining popularity among limited partners (LPs) as they allow LPs to participate in high-quality deals while bypassing fundraising processes and paying lower fees. However, co-investments also come with complexities in deal sourcing, decision making, due diligence capabilities, and adverse selection risks. This article analyzes the appeal of private equity co-investments, summarizes the key challenges LPs face, and concludes with AlpInvest’s co-investment strategy leveraging GP relationships and complex deals expertise.
Co-investments provide higher returns and lower costs, smoothing J curve effect
The article cites Preqin and McKinsey research indicating over 70% of LPs are interested in co-investing for higher returns and lower costs. 36% of LPs expect co-investment returns to exceed main funds by over 5%. Co-investments also reduce management fees and carry, converting cost savings directly into returns. Additionally, co-investments provide earlier positive returns, smoothing overall J curve effects.
Co-investments enhance access and relationships with high-quality GPs
According to the article, co-investing alongside GPs grants LPs closer involvement in deals and processes, strengthening capabilities and relationships. It fosters knowledge sharing, enhances LP reputation among GPs when done successfully, and signals LP interest for future partnerships.
However, sourcing high-quality co-investment opportunities with flexible decision making presents difficulties
The article highlights key co-investment challenges like sufficient deal flow access, evaluating deals with more direct underwriting requirements, making decisions faster relative to main funds, GP adverse selection risks, and portfolio diversification considerations.
In conclusion, private equity co-investments provide higher returns, lower costs and access to quality deals, but require specialized capabilities amidst complex deal dynamics. AlpInvest utilizes its relationships and expertise in GP-led transactions to source unique co-investment opportunities.