Go Inside the Deal: Co-Invest with Your Private Equity Firm

Talk to us
Go Inside the Deal: Co-Invest with Your Private Equity Firm

Share article

Co-investing in the context of private equity refers to the practice where investors pool their resources together to invest in a project or company. Traditionally, this approach has been common among institutional investors like pension funds, endowments, and family offices. However, there's been a noticeable rise in co-investment opportunities for individual investors as well. This shift has been facilitated by the growing accessibility of private equity investments and platforms that allow smaller investors to participate alongside larger institutions.

The benefits of co-investing are numerous. For individual investors, it allows access to investment opportunities that might otherwise be out of reach due to high capital requirements. Co-investing also enables investors to diversify their portfolios, sharing both the risks and rewards with others. Additionally, it can lead to reduced fees, as co-investors often bypass some of the costs associated with traditional fund investments.

A study conducted by Preqin revealed that 80% of Limited Partners (LPs) experienced enhanced performance through equity co-investments as opposed to conventional fund structures. In standard co-investment funds, investors remunerate a fund sponsor or General Partner (GP), establishing a clearly defined private equity partnership. This partnership agreement specifies the methods of capital allocation and asset diversification by the GP. Unlike typical Limited Partner (LP) and General Partner (GP) funds, co-investments bypass these structures by investing directly into a company.

Understanding Private Equity Co-Investment

A. Explaining What Private Equity Firms Do

Private equity (PE) firms specialize in investment strategies that involve direct investments in private companies or buyouts of public companies, resulting in their delisting from public stock exchanges. The primary activities of PE firms include:

  1. Fundraising: They raise capital from institutional and high-net-worth investors.
  2. Deal Sourcing: They identify potential investment opportunities, often seeking companies with growth potential or turnaround prospects.
  3. Due Diligence and Acquisition: PE firms conduct thorough evaluations of target companies, negotiate terms, and acquire stakes.
  4. Value Addition and Management: Post-acquisition, they actively manage these companies, aiming to improve financial performance and strategic positioning.
  5. Exit Strategy: Eventually, they seek to exit these investments profitably, typically through a sale, merger, or IPO.

B. The Concept of Co-Investment in Private Equity

Co-investment in PE occurs when investors directly invest alongside a PE firm in a specific deal, rather than through a commingled fund. It's like a side-by-side investment where both the PE firm and co-investors hold stakes in the target company. Key features include:

  1. Selective Participation: Investors can choose specific deals rather than committing to a diversified fund.
  2. Alignment of Interests: Co-investors and PE firms share similar goals for the investment.
  3. Lower Fees: Typically, co-investments have lower fees compared to traditional PE fund investments.

C. Types of Co-Investment Deals Available to Individual Investors

Individual investors, particularly accredited or qualified investors, now have access to a variety of co-investment deals, such as:

  1. Direct Co-Investments: Investing directly in a target company alongside a PE firm. This type is more hands-on and requires significant due diligence.
  2. Syndicated Deals: These are opportunities where a lead investor (often a PE firm) opens up part of their investment to a group of smaller investors.
  3. Special Purpose Vehicles (SPVs): Sometimes, a temporary entity is created for a single, specific investment, allowing individuals to participate in a deal they couldn't access independently.
  4. Online Investment Platforms: Emerging platforms offer curated PE co-investment opportunities, reducing the traditional barriers to entry for individual investors.

Each type of co-investment deal has its nuances and risk profiles, and it's important for individual investors to thoroughly understand these aspects and consult with financial advisors to ensure alignment with their investment goals and risk tolerance.

Advantages of Co-Investing

A. Potential for Higher Returns

Co-investing in private equity can offer the potential for higher returns compared to traditional investment avenues. This is primarily because private equity investments often target companies with significant growth or turnaround potential. By co-investing directly in such deals, investors can tap into these potentially high-return opportunities. Additionally, being closer to the investment process might offer more insights and control, potentially leading to better decision-making and higher returns.

B. Access to Exclusive Investment Opportunities

Co-investing allows individual investors to access deals that are typically reserved for institutional investors. These opportunities are often not available on public markets and can include investments in high-growth startups, niche industries, or buyout opportunities. Gaining access to these exclusive deals can be a significant draw for individual investors seeking unique investment opportunities beyond the reach of conventional market participants.

C. Diversification of Investment Portfolio

Co-investing can add a valuable layer of diversification to an investor's portfolio. By investing in private companies across different sectors and stages of development, investors can reduce the risk associated with traditional stock and bond portfolios. This diversification can be particularly beneficial in times of public market volatility, as private equity markets often operate under different dynamics.

D. Lower Fees Compared to Traditional Private Equity Investments

One of the most appealing aspects of co-investing is the potential for lower fees. Traditional private equity investments often come with high management fees and carried interest. In co-investing arrangements, these fees can be significantly lower, as investors might bypass some of the layers of fees associated with PE funds. This fee structure can make a substantial difference in net returns, making co-investing an attractive option for cost-conscious investors.

Go Inside

Co-investing with private equity firms holds significant potential for individual investors. It offers a gateway to high-growth opportunities, a chance to diversify investment portfolios, and a more cost-effective route into the world of private equity. The possibility of higher returns, combined with the allure of participating in exclusive deals, makes co-investing an attractive option.

However, the challenges and risks associated with this investment approach cannot be understated. The lack of liquidity, longer investment horizons, and inherent risks of private equity, such as company-specific risks and market uncertainties, require careful consideration. Moreover, the need for substantial due diligence and the potential for lower control over investment decisions are critical factors that investors must weigh.

In essence, while co-investing in private equity offers exciting possibilities, it demands a balanced approach, combining enthusiasm with prudent risk assessment and a clear understanding of one's investment goals and risk tolerance. For those willing to navigate these complexities, co-investing can be a rewarding addition to their investment portfolio.

You may also be interested in: Zive - Fund Admin for Emerging Managers

Get A Demo and experience Zive in action with a complimentary, no-obligation session tailored to your business needs.

Related articles

Change the way you manage funds