A conversation with Ben Wallwork, Partner, Co-investments at Adams Street, about the evolution of the firm’s co-investments platform in tandem with market shifts.
If co-investments were already on the up over the last decade – quadrupling in commitments to $16bn in 2021, according to Pitchbook – the incumbent interest rate environment and consequent fundraising challenges have only served to fuel demand.
Adams Street conducted its first co-investment deal in 1989, says Partner Ben Wallwork, which gives the firm a solid foundation to build on. As it happens, a long-standing track record and well-established relationships are a critical pre-requisite to a successful co-investment platform.
It’s a clear win-win: For investors, co-investments allow for earlier entry into the underwriting of a deal, more selectivity on managers and assets, as well as the highly apparent fee advantage. For managers, it’s an easy way to raise capital – of particular interest under the current circumstances – and can sometimes pave the way for larger than usual deals, or facilitate buy-and-build moves.
But underpinning the transaction is a synergy between all parties involved. “We’re not just underwriting deals but the manager as well. They’re going to be executing the value creation thesis, and we need to make sure we’re working with a high–quality GP that’s aligned with our own objectives,” says Wallwork.
In reality, this means only a select few managers have access to the coveted co-investment: those that fit Adams Street’s sector and thematic focus; and ones that have an existing relationship with the firm.
Growth, dislocation and change
“As financial engineering has fallen out of favour under macro-economic pressure, the focus is on fundamental growth. We work with sector-specialist managers that can identify opportunities to create genuine value at the portfolio level – facilitating growth, dislocation and change,” says Wallwork.
He continues: “As a natural result, we’re overweight in sectors such as tech and healthcare – which not only have strong fundamentals such as low cyclicality, revenue visibility and high margins, but also align with undercurrents such as ongoing digital transformation and demographic shifts.”
That said, the main reason for working with sector-specialist managers is to ensure a level of discernment within these thematic investments. “Not all tech or healthcare is created equal,” says Wallwork.
“Some is mission-critical and some is supplemental – each makes for a very different opportunity set.We choose managers with insight into the sub-sector level, so they can identify investments with real growth potential. It was plain to see what happened when generalist managers poured into the tech sector during the 2021 boom – we want to steer clear of those situations.”
The benefit of hindsight
That said, there is more than sub-sector expertise to consider when selecting a manager. Alongside its suite of direct investment solutions – co-investments included – Adams Street has a primary fund investments platform. Most managers selected for co-investments, Wallwork says, are those with which the firm is already invested through its primary platform.
The benefit is two-fold: a degree of trust and familiarity with the manager’s track record; and the ability to compare deals accepted with those rejected.
“Because we’re invested in the primary fund, we can track the performance of the deals we decline:weighing the alpha of the co-investments team [comparing the performance of the deals we select against the deals we decline],” says Wallwork.
Overall, he reports, the selected co-investments outperform the co-investments that are declined. “But co-investments are only possible on the back of a fund. The fundamental requirement for a successful co-investment programme for us is the broader Adams Street platform with all those fund relationships – without which we wouldn’t see the deals. The two complement each other effectively.”
A notable competitive advantage for established managers, or those with strong LP relationships, co-investments will remain of growing interest as the top of the market continues to draw the lion’s share of capital. Indeed, most allocation stories for stalwart managers currently include partial allocations to co-investment opportunities.
