Key Takeaways
- • Co-investment transactions in private equity and infrastructure have grown significantly over the last 24 months, according to Alvarez & Marsal (A&M), as managers use them to keep deploying capital amid higher interest rates and a difficult fundraising market.
- • Estimated commitments to dedicated co-investment funds totalled approximately £21 billion in 2022, with capital raised for co-investment products bucking wider private capital fundraising trends.
- • A recent market survey cited by A&M found nearly two-thirds of institutional investors are monitoring co-investment opportunities and plan to make acquisitions in the next 12 months.
- • A&M identifies five core tax considerations for co-investors: entry point selection, LP information flows and filing obligations, choice of investment vehicle (such as a US corporate blocker), side letter protections, and tax leakage in valuation models.
- • Co-investors take direct asset exposure with greater upside and downside, must build specialist investment capability, and typically face bespoke fee and carry arrangements with the lead sponsor.
Summary
Alvarez & Marsal reports a significant increase in co-investment transactions across private equity (PE) and infrastructure sectors globally over the last 24 months. According to the firm, the growth reflects a strategic response by fund managers and investors to a tougher dealmaking environment and financial turbulence. Co-investments offer an option at a time when higher interest rates make debt financing for buyouts expensive and difficult to obtain, and they allow managers to keep deploying capital in a challenging fundraising landscape.
Capital raised for co-investment products has risen rapidly, against broader private capital fundraising trends. A&M estimates commitments to dedicated co-investment funds totalled approximately £21 billion in 2022. The firm expects growth to continue at least in the medium term, citing a recent market survey in which nearly two-thirds of institutional investors said they were monitoring co-investment opportunities and planned acquisitions within 12 months. Appetite from larger fund managers is also expected to support further expansion.
In a co-investment, a PE or infrastructure fund invites investors to acquire a direct interest in the underlying asset during a buyout. Co-investors may be existing LPs seeking added exposure or specialist funds set up for the purpose. A&M notes that co-investors gain greater upside on a successful exit but also greater exposure to losses. Capital can be deployed more quickly and remains more liquid because co-investors decide deal by deal. Co-investors take an active role, requiring specialist personnel and external advisers, although work done by the lead fund on tax and other workstreams can provide comfort. Co-investors are generally not subject to the LPs' management fee and carry terms, but may face bespoke fees and carry arrangements with the lead sponsor.
On tax, A&M highlights several considerations. Entry point choice may involve acquiring shares directly in a corporate entity or investing through a deal-specific co-invest partnership, with implications for filing obligations and trading status. Co-investing funds must review LPA or shareholder agreement terms on LP information provision, including Schedule K-1, FATCA and CRS obligations, and disclosure regimes such as DAC6 and DOTAS. Vehicle selection may include a US corporate blocker to insulate non-US LPs from effectively connected income (ECI), though it adds annual administrative cost. Co-investors with US LPs often need to submit a W-8BEN-E form with subscription documents. Standard and deal-specific tax side letters should be negotiated early in the deal lifecycle. Finally, withholding tax and capital gains tax should be reflected in valuation models, and A&M recommends a detailed review of the sponsor's structure and tax advice.
A&M's Financial Investors Tax practice, led by Managing Director Jason Clatworthy, includes over 60 tax professionals serving the UK asset management industry. Its co-investments team, led by Senior Directors John Bettley-Smith and Joe Macklin-Gray, has advised on over 250 co-investment and secondaries opportunities in the last five years. The article is part of a series on alternative fund management trends, with a next installment covering secondaries transactions.
Capital raised for co-investment products has risen rapidly, against broader private capital fundraising trends. A&M estimates commitments to dedicated co-investment funds totalled approximately £21 billion in 2022. The firm expects growth to continue at least in the medium term, citing a recent market survey in which nearly two-thirds of institutional investors said they were monitoring co-investment opportunities and planned acquisitions within 12 months. Appetite from larger fund managers is also expected to support further expansion.
In a co-investment, a PE or infrastructure fund invites investors to acquire a direct interest in the underlying asset during a buyout. Co-investors may be existing LPs seeking added exposure or specialist funds set up for the purpose. A&M notes that co-investors gain greater upside on a successful exit but also greater exposure to losses. Capital can be deployed more quickly and remains more liquid because co-investors decide deal by deal. Co-investors take an active role, requiring specialist personnel and external advisers, although work done by the lead fund on tax and other workstreams can provide comfort. Co-investors are generally not subject to the LPs' management fee and carry terms, but may face bespoke fees and carry arrangements with the lead sponsor.
On tax, A&M highlights several considerations. Entry point choice may involve acquiring shares directly in a corporate entity or investing through a deal-specific co-invest partnership, with implications for filing obligations and trading status. Co-investing funds must review LPA or shareholder agreement terms on LP information provision, including Schedule K-1, FATCA and CRS obligations, and disclosure regimes such as DAC6 and DOTAS. Vehicle selection may include a US corporate blocker to insulate non-US LPs from effectively connected income (ECI), though it adds annual administrative cost. Co-investors with US LPs often need to submit a W-8BEN-E form with subscription documents. Standard and deal-specific tax side letters should be negotiated early in the deal lifecycle. Finally, withholding tax and capital gains tax should be reflected in valuation models, and A&M recommends a detailed review of the sponsor's structure and tax advice.
A&M's Financial Investors Tax practice, led by Managing Director Jason Clatworthy, includes over 60 tax professionals serving the UK asset management industry. Its co-investments team, led by Senior Directors John Bettley-Smith and Joe Macklin-Gray, has advised on over 250 co-investment and secondaries opportunities in the last five years. The article is part of a series on alternative fund management trends, with a next installment covering secondaries transactions.
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