What Co-investing Offers Mid-Sized Managers


By Kyle Campbell

A yearning for direct exposure and greater selectivity among investors has driven demand for co-investment. Second-tier managers, PERE understands, are leveraging that demand by offering co-investment opportunities in a bid to stay competitive with the sector’s fundraising giants.

Private real estate has seen a surge of new capital in recent years, especially among its top managers—Blackstone raised close to $50 billion last year across its funds, according to PERE data, with Brookfield and Starwood trailing behind at $29 billion and $22 billion, respectively. Collectively, the industry’s top three issuers of capital raised as much equity as the next 12 combined.

For smaller and mid-sized managers, co-investments are ways to draw in investors and stay competitive, primarily by offering discounts on management fees and carried interest.
“It’s a way to incentivize institutions to make commitments to their funds because they’re able to average down their fee load,” Jeff Giller, head of real estate at New York-based asset manager StepStone Group, says. “The small and midcap managers are struggling to raise capital so they’re using co-investments to attract LPs.”

There are two strategies for leveraging co-investments into new partnerships, PERE understands. The more accepted method is offering favorable terms for sidecar investments during fundraising with a view to securing large early commitments. The other is making similar offers to investors outside an underlying fund in hopes of locking up their support during future fundraises, thought [sic] this option risks upsetting a manager’s rank-and-file investors.

Cherine Aboulzelof, a managing director at Metropolitan Real Estate, a New York multi-manager, says the strategy has become popular among newer fund managers looking to make a name for themselves.

“There’s a lot of competition for capital between real estate managers—a polarization between the mega-funds that are raising over half of what’s being raised in the market and the smaller managers that are competing for that capital, either emerging managers or first-time managers,” Aboulzelof says.

Philip Marra, head of US real estate funds at audit firm KPMG, tells PERE that investors are drawn to co-investments because they can negotiate deals and have more discretion in molding their portfolio and strategies. “They’re also using them to secure new opportunities alongside familiar sponsors.”

“LPs are narrowing the playing field and focusing on investing with few managers which leads to a higher degree of trust between the advisor and LP and higher degree of co-investment activity,” Marra says.”

Large managers will use co-investments too, but sparingly. Many top managers view sidecars through a traditional lens, as a spot maneuver when unexpected opportunities arise and committed capital has not yet come through, as opposed to incentivizing for future fundraises.

However, some, such as Hong Kong’s Gaw Capital Partners, have bucked that trend, baking it into their investment strategy. Christina Gaw, managing partner and head of capital markets, says the firm has deployed roughly 20 co-investments and joint ventures totaling $3.8 billion in the past four and a half years.

Gaw tells PERE she expects to have more opportunities for this type of investment as recession-wary investors look to exert more control over their holdings. “Since we are in uncertain times right now, I think the trend will stay if not become more prevalent,” she says.

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