More institutional investors are engaging in private equity co-investments with general partners or their peers, eschewing the traditional limited partner-style relationship to take more control of their investments with lower fees. But this alternative structure comes with new risks that must be approached with eyes open.
Main players: Larger investors are more likely to be in co-investment arrangements. Sovereign wealth funds lead in the category, while insurers and public pension funds have also warmed to the approach.
Value drain: Private equity’s value added above the broad U.S. public equity markets* has been erratic in recent years as valuations increased and the market flooded with new assets and funds.
Looks good on paper: Co-investments have shown a better risk/return profile compared to other private equity strategies; however, the sample size remains low and may mask the risks of higher portfolio concentration.
Choose wisely: The cost benefits are the chief drivers of co-investment returns over those of LP structures. Because of the risks posed by higher concentration, Cambridge Associates suggests adding co-investments as part of a larger private equity portfolio.