The growing popularity of direct investment and co-investment in private equity and private equity real estate is threatening to change the general partner-limited partner relationship.
When they co-invest or invest directly, institutional asset owners have a say on what companies or properties to invest in and the timing of the investment. Not so when they commit to blind pools.
Management fees, carried interest and other investors' costs in commingled funds and some separate accounts are often eliminated in a co-investment or direct investment.
But fiduciary responsibility shouldered by general partners could shift to asset owners in direct investments and co-investments.
Bo Ramsey, director of private equity with the $29.4 billion Indiana Public Retirement System, Indianapolis, said co-investors participate more in the deal due diligence than is done in traditional GP-LP relationships. “It makes us better investors,” he said.
Still, the allure of lower fees and greater control is prompting some investors to create allocations to direct investing and co-investing. Other asset owners are making it their primary mode of investing.
Officials at the Indiana fund just started a portfolio-wide co-investment program focused primarily on general partners the pension fund is backing, Mr. Ramsey said in an interview. He said he expects co-investments to make up 10% to 15% of the total of $440 million in private equity commitments this year. The Indiana system has a 10% target allocation to private equity.
Some in the industry call direct and co-investment “shadow capital” because its existence in deals is often kept secret from everyone other than the LPs involved. These days, it is playing the role once played by club deals (the combination of two or more private equity firms) that were popular before the financial crisis.