Growing interest for private equity co-investments

Over the last years, traditional investors in private equity (PE) like institutional investors, as well as high net worth individuals and family offices have become highly sophisticated in evaluating private investment opportunities. As a consequence, and to complement traditional investments through PE funds, co-investments have become increasingly popular among professional investors seeking higher returns together with lower fees, enhanced transparency and greater control over their investments.

According to a survey conducted by Preqin dealing with over 100 institutional investors from around the world, the two major reasons leading investors to opt for co-investment are better returns and lower fees. Co-investing with General Partners also provides investors with direct exposure to industries they would not access otherwise, thus, enhancing their experience in new sectors of economic activity. Furthermore, direct investment provides a solution to the issue of lacking transparency pertaining to PE funds, as direct investors have a better control over their investments.

Typically, co-investors are existing limited partners in an investment fund, who make minority investments directly into an operating company, alongside a financial sponsor or other PE investor, in a leveraged buy-out, recapitalization or growth capital transaction. From the PE firm’s side, co-investments are also highly beneficial as they allow managers to make larger investments without dedicating too much of the fund’s capital to a single transaction, or sharing the deals with competing PE firms. In addition to providing further capital, co-investors could offer strategic benefits to a portfolio company. For instance, an operating partner who co-invests in a fund may bring special skills to the portfolio company, developing strategic relationships or offering industry expertise.

The “win-win” co-investment between minority investors and PE funds can take two different forms; either at the level of the holding company, which then invest in the operating portfolio company, or directly in the operating portfolio company. Whether the co-investment is direct or indirect will depend on investors’ expectations, such as the level of control required over investments, the level of interaction with the fund, the management fees they are willing to accept or the transparency of the portfolio company.

ValleyRoad Capital, in its pioneering role at introducing Mezzanine Trade Finance as a new segment of PE investments is offering flexibility to investors by proposing direct co-investment, together with investing through the traditional fund structure.

Sources :
Pepper Hamilton law
Preqin