September 30, 2014
Co-investing is the practice of making non-control direct equity investments in individual transactions alongside general partners who source, or sponsor, the deal. Co-investing became institutionalized in the mid- to late-1990s as the overall private equity industry began to mature and has become a more prevalent allocation in investors’ portfolios. According to StepStone’s analysis, co-investment dollars represented 13% of total equity invested in 2012, up from 1% in 2000 and on par with 2007.
Co-investments have clearly become more popular. However, researchers and LPs alike continue to question whether co-investments are a healthy choice or a guilty pleasure. Skeptics have several concerns, including (i) “adverse selection,” or the sense that GPs may not be showing their best deals to prospective co-investors; and (ii) limited evidence that co-investment programs (including funds) have matched the returns of buyout funds.
We conducted our own analysis of a dataset of 400 co-investments completed by 97 GPs and found that co-investments have held attractive return potential.