Working with hundreds of institutional LPs who are active co-investors gives us maximum visibility to the market. Looking to 4,600 co-investments across our clients we see a massive 20-fold increase in participation over the past 15 years. This increase in popularity can be attributed both to investors looking to relieve net fees, but also more active portfolio management.
Like all investments, co-investments are cyclical and the alpha they bring varies by asset class. Investors should take care not just to ‘tick the box’ and hope for the best. The best performing co-investments certainly come from those who are selective about the deals they participate in and have a qualified team to evaluate. Execution, quality and speed are also critical to success and this can include not only industry knowledge, but also legal support.
Where co-investments shine is for portfolio construction and risk hedging. Capital in private equity-type funds is generally dispersed because you invest into a blind pool and 75 percent of funds are mixed. With relatively small co-investments, you can significantly increase concentration in single sectors, segments and geographies. We frequently help investors to measure their portfolio correlation and beta risk in both private markets and stocks and bonds, and then can suggest tactical co-invests that are counter-correlated, and thus provide a hedge in case of a market downturn.