Key Takeaways
- • Total capital raised for private equity co-investments rose from $4 billion in 2010 to $10.3 billion in 2022, according to PitchBook data cited in the EY article.
- • The number of private equity funds fell significantly in 2022, from 1,129 to 597, as LPs became more selective and fundraising for first-time funds hit a nine-year low.
- • Almost two-thirds of institutional investors plan to invest directly alongside their GPs over the next 12 months, and 42.5% of family offices globally already engage in co-investment.
- • Co-investments are typically offered without management or performance fees, but the majority of co-investors are passive, drawing SEC scrutiny and raising conflict-of-interest concerns.
Summary
Co-investments allow investors to back specific private equity deals directly alongside PE managers, offering greater transparency, control and potential for higher returns than traditional blind-pool funds, where investors commit capital without knowing which companies will be acquired. According to an EY analysis, family offices in particular have increasingly partnered directly with general partners (GPs) on individual transactions.
Co-investment activity has grown considerably. Citing PitchBook data, the article reports that capital raised for PE co-investments increased from $4 billion in 2010 to $10.3 billion in 2022. The growth reflects a difficult fundraising environment: the number of PE funds declared fell sharply in 2022, from 1,129 to 597, as limited partners grew more cautious and concentrated commitments with experienced managers. First-time fund fundraising reached its lowest level in nine years. GPs turned to co-investment capital to fill equity gaps, buy time to raise subsequent commingled funds, and diversify portfolios. Tighter credit conditions and higher interest rates also raised the cost of debt for buyouts, further increasing demand for equity co-investment.
The article cites a Private Equity International roundtable finding that almost two-thirds of institutional investors plan to invest directly alongside their GPs over the next 12 months. Family offices are at the forefront, with 42.5% globally already engaged in co-investment, including club deals, investments alongside a PE fund without committing to the fund itself, and joint ventures with other families. The article notes the family office sector's more relationship-oriented approach.
For GPs, co-investment enables larger positions in attractive companies despite single-firm concentration limits. For LPs, it offers targeted access to private firms and avoids the fee layering and multi-year deployment lag associated with fund-of-funds. The article says co-investors typically hold 25 to 30 companies across managers, geographies and sectors, and that co-investments are generally offered without management or performance fees.
The EY piece also flags risks. The co-investor market has become saturated and quality varies widely. Most co-investors are passive rather than leading or underwriting deals, a gap that has drawn attention from the SEC, which is reviewing potential regulation. Conflicts of interest are a further concern, including GPs over-allocating attractive deals to likely future fund investors and dilution of major fund investors' stakes.
Co-investment activity has grown considerably. Citing PitchBook data, the article reports that capital raised for PE co-investments increased from $4 billion in 2010 to $10.3 billion in 2022. The growth reflects a difficult fundraising environment: the number of PE funds declared fell sharply in 2022, from 1,129 to 597, as limited partners grew more cautious and concentrated commitments with experienced managers. First-time fund fundraising reached its lowest level in nine years. GPs turned to co-investment capital to fill equity gaps, buy time to raise subsequent commingled funds, and diversify portfolios. Tighter credit conditions and higher interest rates also raised the cost of debt for buyouts, further increasing demand for equity co-investment.
The article cites a Private Equity International roundtable finding that almost two-thirds of institutional investors plan to invest directly alongside their GPs over the next 12 months. Family offices are at the forefront, with 42.5% globally already engaged in co-investment, including club deals, investments alongside a PE fund without committing to the fund itself, and joint ventures with other families. The article notes the family office sector's more relationship-oriented approach.
For GPs, co-investment enables larger positions in attractive companies despite single-firm concentration limits. For LPs, it offers targeted access to private firms and avoids the fee layering and multi-year deployment lag associated with fund-of-funds. The article says co-investors typically hold 25 to 30 companies across managers, geographies and sectors, and that co-investments are generally offered without management or performance fees.
The EY piece also flags risks. The co-investor market has become saturated and quality varies widely. Most co-investors are passive rather than leading or underwriting deals, a gap that has drawn attention from the SEC, which is reviewing potential regulation. Conflicts of interest are a further concern, including GPs over-allocating attractive deals to likely future fund investors and dilution of major fund investors' stakes.
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