Key Takeaways
- • According to S&P data cited in the article, global private equity deal value fell 51% year over year in the first six months of 2023, while transaction count dropped 39%, yet co-investment funds have proven comparatively resilient.
- • Co-investment funds let limited partners back specific GP deals, with best-in-class programmes spreading capital across up to 35 co-investments to diversify industry, geography, size, and vintage exposure.
- • Co-investments carry lower fees than the traditional 2% management and 20% performance fee structure, and a recent academic study found co-investments produce comparable or greater gross returns than the rest of a GP's portfolio.
- • Swancap, with €4bn under management across multi-investor funds, recently announced its Swan VI co-investment fund, while Antwort Capital argues co-investment is an efficient way to add private equity exposure.
- • Continuation vehicles, which account for only about 5% of exits against roughly $3trn in unrealized GP-held value, are emerging as a competing source of deal flow that blurs the line between co-investment and secondaries.
Summary
According to S&P data cited in the article, global private equity deal value dropped 51% year over year in the first six months of 2023, and transaction volume declined 39%. Despite this challenging backdrop, the article argues that the co-investment segment has shown notable resilience. Co-investment funds allow limited partners to invest alongside general partners in specific transactions, and the article presents several benefits that are driving their growing popularity among institutional and private investors.
The article emphasizes diversification as a core advantage. Co-investment managers can generate a large funnel of opportunities and select only those meeting risk-reward and portfolio criteria. Best-in-class managers offer programmes spanning up to 35 co-investments, spreading exposure across industries, geographies, size brackets, vintages and investment techniques. Access to multiple GPs further reduces dependence on the performance of any single manager.
Cost is another differentiator. The article notes that traditional private equity funds typically charge a 2% management fee and a 20% performance fee, whereas co-investment structures carry lower or significantly reduced costs. Research cited in the article, which revisits earlier studies focused on 2006 to 2007 mega-deals, finds co-investments produce comparable or greater gross returns than the rest of a GP's portfolio. The article attributes this partly to GPs offering co-investments only after exhausting their own fund's concentration limits, and to reputational incentives discouraging poor deals. The research also highlights that single co-investments can underperform the average fund given skewed deal-level returns, so reasonably sized portfolios are preferable.
The article describes the current environment as supportive for co-investment. Some co-investors are exiting amid liquidity challenges, while some large US pension funds have moderated their co-investment activity over capacity concerns and Middle Eastern LPs have increased theirs. Lengthening fundraising timelines and higher equity requirements are pushing GPs toward co-investment capital.
Claus Mansfeldt, chairman of Swancap, which manages €4bn across multi-investor funds including the recently announced Swan VI co-investment fund, argues that co-investment funds let investors maximize returns while limiting risk. Manuel San Salvador, managing partner at Antwort Capital, a feeder platform focused on top-quartile private equity funds, says private equity typically represents 10% to 15% of a diversified portfolio and can add up to 2% annual return over a ten-year period, with co-investment further enhancing that allocation by reducing duplicated fees associated with funds of funds.
The article identifies continuation vehicles as a competing force. Under the distinction described, an asset new to the GP is a co-investment, while prior exposure makes it a secondary. The fundamental economic difference is that continuation vehicles carry fees and carry, whereas co-investments typically do not. Continuation vehicles account for only about 5% of exits despite roughly $3trn in unrealized value held in GP-owned private equity projects.
Deal flow for co-investment remains strong, though prices are elevated, with limited change outside technology, particularly in the United States. Valuations in Europe have shifted due to debt uncertainty and geopolitical tensions, with premiums for businesses showing long-term revenue strategies, steady growth and pricing power. Healthcare, critical business services, asset management, insurance brokerage, and food and distribution are also in high demand, and infrastructure co-investment has grown on inflation correlation and downside protection.
The article emphasizes diversification as a core advantage. Co-investment managers can generate a large funnel of opportunities and select only those meeting risk-reward and portfolio criteria. Best-in-class managers offer programmes spanning up to 35 co-investments, spreading exposure across industries, geographies, size brackets, vintages and investment techniques. Access to multiple GPs further reduces dependence on the performance of any single manager.
Cost is another differentiator. The article notes that traditional private equity funds typically charge a 2% management fee and a 20% performance fee, whereas co-investment structures carry lower or significantly reduced costs. Research cited in the article, which revisits earlier studies focused on 2006 to 2007 mega-deals, finds co-investments produce comparable or greater gross returns than the rest of a GP's portfolio. The article attributes this partly to GPs offering co-investments only after exhausting their own fund's concentration limits, and to reputational incentives discouraging poor deals. The research also highlights that single co-investments can underperform the average fund given skewed deal-level returns, so reasonably sized portfolios are preferable.
The article describes the current environment as supportive for co-investment. Some co-investors are exiting amid liquidity challenges, while some large US pension funds have moderated their co-investment activity over capacity concerns and Middle Eastern LPs have increased theirs. Lengthening fundraising timelines and higher equity requirements are pushing GPs toward co-investment capital.
Claus Mansfeldt, chairman of Swancap, which manages €4bn across multi-investor funds including the recently announced Swan VI co-investment fund, argues that co-investment funds let investors maximize returns while limiting risk. Manuel San Salvador, managing partner at Antwort Capital, a feeder platform focused on top-quartile private equity funds, says private equity typically represents 10% to 15% of a diversified portfolio and can add up to 2% annual return over a ten-year period, with co-investment further enhancing that allocation by reducing duplicated fees associated with funds of funds.
The article identifies continuation vehicles as a competing force. Under the distinction described, an asset new to the GP is a co-investment, while prior exposure makes it a secondary. The fundamental economic difference is that continuation vehicles carry fees and carry, whereas co-investments typically do not. Continuation vehicles account for only about 5% of exits despite roughly $3trn in unrealized value held in GP-owned private equity projects.
Deal flow for co-investment remains strong, though prices are elevated, with limited change outside technology, particularly in the United States. Valuations in Europe have shifted due to debt uncertainty and geopolitical tensions, with premiums for businesses showing long-term revenue strategies, steady growth and pricing power. Healthcare, critical business services, asset management, insurance brokerage, and food and distribution are also in high demand, and infrastructure co-investment has grown on inflation correlation and downside protection.
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