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80 per cent of PE investors see co-investments outperform comingled funds

Some 80 per cent of limited partners (LPs) have seen their co-investments outperforming private equity funds, with 46 per cent seeing their co-investments outperform by a margin of over 5 per cent, according to a survey by Preqin.

This level of performance is the biggest draw for investors, with two-thirds of LPs citing better returns as the biggest benefit of co-investing alongside GPs.
Co-investment opportunities from fund managers (GPs) are also becoming more common, with 87 per cent of them either currently offering, or considering offering, co-investment rights to their investors. Furthermore, 30 per cent of managers included co-investment rights in 81-100 per cent of limited partnership agreements in their most recent fund. For fund managers, Co-investments are seen as a way to improve relationships with LPs, gain access to more capital for deals, and improve the chance of a successful fundraise.
Almost two-thirds (63 per cent) of investors surveyed have allocated additional co-investment capital equating to 1-20 per cent of their original commingled fund commitment. LPs typically commit USD2-10 million in each co-investment. Seventy-seven percent of investors favour a small to mid-market buyout strategy.
The average proportion of equity in a deal that comes from LP co-investors rose from 2014 to H1 2015. In 2014, only 18 per cent of managers reported their deals had 40 per cent or more of their equity from co- investments. In H1 2015, that proportion doubled to 36 per cent.
Forty per cent of fund managers reported that in H1 2015, none of the LPs they offered co- investment opportunities to actually co-invested with them. This represents a sharp increase of 11 percentage points from 2014.
Almost half (49 per cent) of GPs charge no management fee on co-investments, and 48 per cent charge no carried interest. A quarter of managers maintain the same carried interest rate for co-investments as in their commingled funds, and only 16 per cent charge the same level of management fees.
The majority (59 per cent) of investors take a ‘selective follower’ approach to co-investment, often being offered syndicated opportunities by managers. Investors co-leading deals is not widespread, with only 13 per cent of managers offering LP co-lead opportunities on deals, and 10 per cent of LPs participating in such deals.
“The most common motivation among LPs for co-investing beyond their typical fund commitments is the prospect of better returns, with many anticipating notably higher returns compared to their traditional private equity fund commitments,” says Christopher Elvin (pictured), Head of Private Equity Products at Preqin. “The majority of LPs surveyed have seen significant outperformance from their co-investments, although many say that it is too early to tell how their stakes will ultimately perform.

“Direct investments, including co-investments, have increasingly become part of private equity discourse. Significant interest arising from LPs has been matched by increased co-investment opportunities provided by GPs. Provided LPs have sufficient resources available, co-investment opportunities should remain attractive due to their lower fees and greater potential returns.” 

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