Key Takeaways
- • Goldman Sachs Asset Management analysis reveals stark performance divergence: co-investments alongside high loss ratio GPs show 34% marked below cost versus only 9% for low loss ratio GPs, while 20% of high loss ratio co-investments exceed 3.0x net returns compared to 16% for low loss ratio peers.
- • Fund size growth and GP check size proportions demonstrate no statistically significant negative impact on co-investment performance, contrary to potential investor concerns about scalability effects.
- • Private equity co-investment market discipline requires selectivity and rigorous GP evaluation rather than portfolio-wide deployment; a cautious, pick-and-choose approach is essential when co-investing alongside managers with elevated historical loss ratios.
- • Successful co-investment programs depend critically on access to a broad ecosystem and deep manager roster to source high-volume deal flow, enabling pattern recognition in GP relationships and superior asset selection.
- • LPs prioritize asset selection and GP relationship analysis over fee savings optimization to capture full strategic value from co-investment strategies.
Summary
Goldman Sachs Asset Management's analysis of the private equity co-investment landscape underscores the material importance of general partner (GP) risk profile in determining investment outcomes. The research examined performance across 50 co-investments sourced from high loss ratio GPs and 108 co-investments from low loss ratio GPs, revealing significant performance stratification. Among high loss ratio GP co-investments, 34% were marked below cost at measurement, indicating substantial write-downs, while only 9% of low loss ratio GP co-investments faced similar underwater positions. Conversely, the upside opportunity set shows modest differentiation: 20% of high loss ratio co-investments surpassed 3.0x net returns versus 16% for low loss ratio counterparts.
These findings establish a clear risk-return tradeoff that influences LP portfolio construction. The research indicates that GP historical loss ratios serve as a predictive signal for co-investment volatility and downside risk. Goldman Sachs recommends that LPs adopting a cautious approach when deploying capital alongside managers with elevated historical losses should avoid broad portfolio deployment in favor of highly selective, limited co-investment positions. This selectivity-driven framework prioritizes deep due diligence and pattern recognition over the pursuit of maximized deal flow or fee arbitrage.
Contrary to conventional concerns about scalability headwinds, the analysis found that neither fund-over-fund size growth nor the proportion of a GP's fund-level check size relative to total deal equity produces statistically significant performance degradation. This finding suggests that structural factors commonly flagged as co-investment risk variables may be less determinative than GP-level operational and historical loss metrics.
The Goldman Sachs perspective positions co-investments as strategically valuable when approached with discipline and rigorous analysis, yielding returns that exceed those of parent funds on average. Success requires LPs to maintain access to a broad ecosystem of managers and a deep roster from which to source substantial opportunity volume. By anchoring investment decisions to asset selection quality and GP relationship pattern recognition rather than fee savings optimization alone, institutional investors can better capture the full strategic value embedded in the co-investment market.
These findings establish a clear risk-return tradeoff that influences LP portfolio construction. The research indicates that GP historical loss ratios serve as a predictive signal for co-investment volatility and downside risk. Goldman Sachs recommends that LPs adopting a cautious approach when deploying capital alongside managers with elevated historical losses should avoid broad portfolio deployment in favor of highly selective, limited co-investment positions. This selectivity-driven framework prioritizes deep due diligence and pattern recognition over the pursuit of maximized deal flow or fee arbitrage.
Contrary to conventional concerns about scalability headwinds, the analysis found that neither fund-over-fund size growth nor the proportion of a GP's fund-level check size relative to total deal equity produces statistically significant performance degradation. This finding suggests that structural factors commonly flagged as co-investment risk variables may be less determinative than GP-level operational and historical loss metrics.
The Goldman Sachs perspective positions co-investments as strategically valuable when approached with discipline and rigorous analysis, yielding returns that exceed those of parent funds on average. Success requires LPs to maintain access to a broad ecosystem of managers and a deep roster from which to source substantial opportunity volume. By anchoring investment decisions to asset selection quality and GP relationship pattern recognition rather than fee savings optimization alone, institutional investors can better capture the full strategic value embedded in the co-investment market.
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