Co-investments provide an opportunity to capture a greater share of attractive investments, and a large majority of investors find co-investments perform better than primary fund investments.
At the same time, co-investments also provide a broader dispersion of outcomes — offering outsized potential to add either significant risk or greater returns — compared to fund investing. This dispersion can be amplified within a portfolio and create idiosyncratic exposures if co-investment deals are over- or opportunistically weighted.
For example, co-investments are often the largest deals of the manager's fund, but not necessarily the highest quality deals. An investor might inadvertently be paying up for an opportunity that could overweight a portfolio in favor of large-cap investments and also greater capital loss risk.
Equally weighting each co-investment opportunity is a thoughtful and easy to implement mechanism that provides optimal exposure and a measure of protection against that dispersion. Anecdotally, we have found that an equally weighted portfolio also generally outperforms a portfolio that opportunistically sizes investments.
Further, equally weighting co-investments sets a standard within the program, improving the conviction in the opportunity and efficiency to which they are analyzed. Once this standard is set, managers can have more conviction that investors are the right partners for the opportunity and the investors can have the confidence that they will be presented with opportunities that are a better fit.
Importantly, some of the best co-investment opportunities are those that move the fastest, potentially ranging anywhere from months to just five days. Managers and investors alike never strive to leave a quality co-investment opportunity on the table — leading to a premium on due diligence efficiency.