Private Equity: Co-investing vs Commingled

PE managers are becoming more open to co-investments as evidence indicates superior returns.

Returns from co-investment in private equity are outperforming traditional fund models, according to new research.

Data company Preqin reported that 80% of limited partners (LPs) it surveyed saw co-investments outperform private equity funds, and nearly half saw a margin of more than 5%.

“The most common motivation among LPs for co-investing beyond their typical fund commitments is the prospect of better returns,” said Christopher Elvin, head of private equity products at Preqin—although he emphasized that several investors had said it was “too early to tell how their stakes will ultimately perform”.

“Provided LPs have sufficient resources available, co-investment opportunities should remain attractive due to their lower fees and greater potential returns,” Elvin added.

Co-investments - source: Preqin

Preqin also reported an improving appetite for co-investments among GPs: 87% of the 320 managers questioned said they either offered co-investments or planned to for future fundraising.

In addition, 84% said offering co-investments helped forge stronger relationships with investors, and 76% said the option improved their fundraising capabilities.

Nearly a quarter (23%) of GPs reported raising at least half of their capital from co-investments in the first half of 2015, compared to 11% for the whole of 2014.

Among the biggest private equity deals completed in 2014—valued at $1 billion or more—Preqin said 57% of them included co-investment capital. For the first of 2015 this figure was just 20%.

Pension funds on both sides of the Atlantic are exploring a simplified, cheaper way of accessing private equity. The Ontario Municipal Employees’ Retirement System has established an in-house private equity capability, while the UK’s Railpen is exploring a similar move within its £21 billion ($32 billion) portfolio.

Related: The Argument for Private Equity & Private Equity: Remarkably Easy?