Joining Forces: The Co-investment Climate in Private Equity
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.
Pepper Hamilton commissioned Mergermarket to interview 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.
Key findings 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).
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