Co-investing in private equity has more than doubled in a decade and accounted for approximately USD40 billion in US private investment activity last year, according to research by Cambridge Associates. That figure represents about 20 per cent of total US private equity investment.
Co-investment allows institutional investors or high net worths to invest directly into an investee company alongside a private equity fund without having to pay the fees that they would normally have to.
Andrea Auerbach, Head of Global Private Investments at Cambridge Associates explains one of the major advantages of co-investment is allowing investors to materially reduce their cost of accessing this asset class. The traditional (2 and 20) fee structure remains essentially unchanged in private equity despite falling returns over the last two decades.
While the median net internal rate of return of global private equity funds declined from 20.2 per cent in 1993 to 10.7 per cent in 2015, the traditional fund fee structure remained essentially unchanged.
Auerbach also explains that co-investment allows investors to specifically time their investment into the market rather than investing through a fund.
Says Andrea: “With co-investments, you can actually time the market by deploying capital at a specific moment – in a private investment context. Compared to making a fund commitment, that is quite an opportunity, and one well worth considering.”
