The benefits of a co-investment strategy

For private market investors looking to make single company investments, opportunities have never been greater. Co-investment funds attracted $20 billion in investor commitments last year, according to PitchBook data, as limited partners (LPs) seek access to assets that have the potential to yield higher returns at a lower cost. As many as two thirds of investors said they planned to make co-investments this year, according to Private Equity International’s LP Perspectives 2022 Study

Co-investments effectively allow LPs to invest directly in companies alongside a general partner (GP)—either before an acquisition or after it is completed. Aside from the potentially chunkier returns on offer, co-investments provide earlier liquidity than traditional fund investments. Capital is also generally deployed almost immediately, which gives investors greater control over when their cash is put to work (as opposed to waiting for funds to drawdown their commitments).

Co-investment deals also give investors greater freedom to customise their investment strategies than a traditional fund might offer. For instance, a co-investment strategy might focus on specific sectors or geographies. Fee structures also tend to be more attractive for investors, with lower management fees and reduced carried interest when compared to a traditional private equity fund. In technical terms, this can reduce the ‘J-curve’—where returns tend to be negative in the early years of an investment before it matures. BlackRock estimates that a co-investment allocation of 20-30% can shorten the J-curve by 12 to 18 months.

While co-investments were previously generally only available to large institutional investors, co-investment programmes like Titanbay’s now give smaller investors access to the same opportunities, enabling them to increase the quality of their private market portfolios while also being able to take concentrated positions in select individual companies that they find compelling.