How do private equity co-investments work and what are they used for?

There are many ways to invest in private equity. As more investors can now access this asset class, we describe the advantages of co-investing.

Private equity is an increasingly attractive area for investors who want to diversify their portfolio.

While it is a well-known sector for many institutional investors, it is less so for individual investors.

Investing in private equity requires an understanding of some key risks – such as illiquidity – but it also requires specialised knowledge of routes to market.

Typically, a private equity programme is focused on investing in a fund. These funds may target particular market segments or sectors which can at times, limit the market opportunity.

Another way to invest in private equity is through a co-investment strategy, which can help to access more opportunities and at a lower price than investing though a fund.

What is a co-investment?

Co-investments provide Limited Partners (“LPs”), such as pension funds or asset managers, with the opportunity to invest directly into businesses alongside General Partners (“GPs”), like a private equity company.

This way of investing can provide a higher diversification across managers, sectors, strategies and geographies and even a higher degree of selectivity when assessing deals, compared to other approaches.

Co-investing also gives the opportunity to engage more actively with the companies, such as on sustainable practices and behaviours.

Co-investing in times of crisis

In times of crisis, co-investments have the ability to invest at lower entry valuations and attractive terms. Historically, investors have been reluctant to sell immediately post crisis to avoid the down-market.

And in times where liquidity in the market is scarce and merger and acquisitions (M&A) activity drops, having a close relationship with an expert GP that has insights in a certain industry can lead to better deals with lower competition and better execution.

Crises such as Covid-19 or the war in Ukraine have impacted different areas of the economy.

For example, the Covid-19 crisis has accelerated many changes in consumer behaviour, giving a strong boost to digital products and services, and also highlighted the resilience of the healthcare and business to business (B2B) technology sectors. These areas provide attractive growth opportunities, albeit likely at premium valuations.

Other resilient sectors, which may not have directly benefitted from the crisis but have held up well, also present attractive opportunities.

Overall, the effects of a crisis could represent a strategic premium for those businesses insulated from the cyclical downturn. Robust companies or those with counter-cyclical qualities will likely be in high demand, as investors look for businesses that can insulate themselves from future crises.

Looking forward, there are certain features we are focusing on in our private equity co-investments.

Firstly, we look at companies that can be resilient to future crisis, such as those ‘mission critical’ businesses, meaning those that sell a product or a service that customers cannot operate without.

These are companies that have long-term growth prospects supported by megatrends such as aging population, energy transition, or hard-to-find, specialist skills.

In terms of market cap, we believe small and mid-sized companies in European family businesses can offer more opportunity for growth. We believe they can also benefit the real economy, and are more attractively valued than larger companies.

In the buyout space, small and mid companies are less reliant on the availability of large debt packages and financial engineering to support returns and their transformation (investing in new systems and technology, hire new management). This makes them less dependent on the global capital markets, and therefore, they are less correlated with market returns.


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