Flying solo appears to pay off, at least in private equity investing.
Investors that make private equity investments directly in companies get better returns with lower costs than they would by co-investing alongside their private equity managers or investing in private equity funds, according to a new paper co-authored by Josh Lerner, the Jacob H. Schiff Professor of Investment Banking at Harvard Business School, Boston.
A growing number of large institutional investors have been ditching the private equity fund investment model to make direct investments. These investors are attracted by the lower fees and increased control over investment selection. While a few have been investing directly for more than a decade, a growing number of investors have been showing interest in investing directly over the past 12 to 18 months. Investors that have gone the solo direct route include University of Michigan endowment, China Investment Corp., Teachers Retirement System of Texas and Ontario Teachers' Pension Plan.
The C$117.1 billion (US$117.8 billion) Ontario Teachers is one of the most experienced. It has been making direct investments since 1991. In October, it closed a C$150 million equity financing of Canbriam Energy Inc. through its private equity investment division, Teachers' Private Capital.
The $113 billion Austin-based Texas Teachers' pension fund is also an experienced co-investor. On Oct. 23, it invested $200 million in restricted securities of Delta Topco Ltd., a sports media company that owns Formula One Group. Some 10% of Texas Teachers' $13 billion private equity portfolio is in similar investments.
Other investors such as China Investment Corp. are newer to direct investment, especially going solo. In May, Blackstone Group led a deal that included $500 million investments by a group that included China Investment Corp. and Government of Singapore Investment Corp. in Cheniere Energy Partners LP, Houston, which has a natural gas facility in western Cameron Parish, La.(CIC owns a $3 billion stake in New York-based alternative investment firm, Blackstone Group.)