Institutional Investors Continue to Warm Up to Co-investments
Deals benefit from dispersal of risk, ability to extract more capital and collaboration with co-investors
Private equity (PE) firms are becoming increasingly hungry to offer limited partners (LPs) the chance to invest and are being more proactive than reactive, according to a new study Joining forces: The co-investment climate in private equity.
The survey, sponsored by Pepper Hamilton LLP in association with Mergermarket, found that 56 percent of general partners (GPs) are actively exploring investment opportunities that enable their funds to offer occasions to co-invest, while (42 percent) offer co-investing on an opportunistic basis. Furthermore, 64 percent of GPs say that co-investors have contributed between 21 percent and 40 percent of the dollar value of equity invested in deals done by their funds.
Other key findings from the report include:
- Over three-quarters (76 percent) of respondents cite regulatory scrutiny as one of the biggest challenges to co-investments, followed by lower returns for sponsors (56 percent)
- Providing deal information to prospective LPs was seen by nearly half of respondents as the most common type of arrangement to keep PE and co-investor interest aligned
- The deal term most often included in co-investment transactions — noted by 68 percent of respondents — is tag along rights, followed by the obligation to fund follow on investments proportionally (58 percent) and requiring a separate audit of the co-investment vehicle (52 percent)
"Co-investments offer PE groups an alternative way to raise funds and generate returns," says the report. "However, to get the most out of them, buyout houses must learn to work with, and not for, previously passive investors."
Pepper Hamilton LLP, a multi-practice law firm with more than 500 lawyers nationally, commissioned Mergermarket to survey 50 PE executives from across the United States that have co-invested with an institutional investor within the previous three years (fund sizes managed by the interviewees were equally split between US$250m-US$500m and US$501m-US$999m). Interviewees were asked how co-investments fit into their respective portfolio's makeup, and on what basis they are doing deals together.
Bruce K. Fenton, Pepper Hamilton partner and chair of the firm's Private Equity Group and Investment Funds Industry Group (IFIG), noted "IFIG lawyers work saessly in representing funds across the liquidity spectrum from illiquid funds to publicly traded mutual funds. The opportunity to partner with Mergermarket to gauge what is going on with co-investments in the private equity industry was a natural topic to bring the talents of the different facets of the practice together."
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Contact:
Chrissy Carney
PR Manager—Americas
The Mergermarket Group
chrissy.carney@mergermarket.com
Bruce K. Fenton
Partner, Pepper Hamilton LLP
fentonb@pepperlaw.com
Content contributed by attorneys of Troutman Sanders LLP and Pepper Hamilton LLP prior to April 1, 2020, is included here, together with content contributed by attorneys of Troutman Pepper (the combined entity) after the merger date.