Private Equity: Co-investing vs Commingled

Returns from co-investment in private equity are outperforming traditional fund models, according to new research.

Data company Preqin reported that 80% of limited partners (LPs) it surveyed saw co-investments outperform private equity funds, and nearly half saw a margin of more than 5%.

“The most common motivation among LPs for co-investing beyond their typical fund commitments is the prospect of better returns,” said Christopher Elvin, head of private equity products at Preqin—although he emphasized that several investors had said it was “too early to tell how their stakes will ultimately perform”.

“Provided LPs have sufficient resources available, co-investment opportunities should remain attractive due to their lower fees and greater potential returns,” Elvin added.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

Co-investments - source: Preqin

Preqin also reported an improving appetite for co-investments among GPs: 87% of the 320 managers questioned said they either offered co-investments or planned to for future fundraising.

In addition, 84% said offering co-investments helped forge stronger relationships with investors, and 76% said the option improved their fundraising capabilities.

Nearly a quarter (23%) of GPs reported raising at least half of their capital from co-investments in the first half of 2015, compared to 11% for the whole of 2014.

Among the biggest private equity deals completed in 2014—valued at $1 billion or more—Preqin said 57% of them included co-investment capital. For the first of 2015 this figure was just 20%.

Pension funds on both sides of the Atlantic are exploring a simplified, cheaper way of accessing private equity. The Ontario Municipal Employees’ Retirement System has established an in-house private equity capability, while the UK’s Railpen is exploring a similar move within its £21 billion ($32 billion) portfolio.

The former leader of a UK government-backed social enterprise foundation has joined the Gates Foundation’s London office to increase its socially-responsible investments.

Nick O’Donohoe, who announced he would leave Big Society Capital by the end of the year in May, will join the US-based foundation in January as senior adviser for blended finance.

“Operating out of London, Nick will work with deal teams and drive forward the foundation’s work in this area, including through engagement with co-investors and partners.”—Gates Foundation“London is a thriving centre of innovative investment solutions for development and we are delighted that such a senior private sector figure with his stellar background in banking in the City has agreed to join the foundation,” said Joe Cerrell, managing director for global policy and advocacy at the Bill & Melinda Gates Foundation. “Innovative finance models offer huge opportunities to improve the lives of the world’s poorest people and Nick’s experience and achievements leading the world’s first social investment institution of its kind will help deepen our engagement in this area.”

The foundation, which is estimated to have around $70 billion assets, has created this new role at what it called “a critical juncture for international development and the future of innovative social investment.”

For more stories like this, sign up for the CIO Alert newsletter. 

Following the success of the Millennium Development Goals set by the United Nations, the organisation set a new series of ambitious targets to eliminate poverty and protect the planet from the effects of climate change, a note from the foundation said.

“To achieve these goals, governments agreed… that, while development aid will remain vital, domestic resource mobilisation and new and innovative financing mechanisms from both the public and private sectors would be critical,” the foundation said. “New ways of crowding in private capital will be a crucial part of the future of development finance.”

In his new role, O’Donohoe, who has a long career in both banking and social and impact finance, will originate, execute, and manage transactions involving innovative financial mechanisms (particularly within the returnable capital/blended finance space) and program-related investments (PRIs).

PRIs are used to further the foundation’s programmatic and charitable objectives by offering financial tools such as low-interest loans, guarantees, and equity investments to stimulate private-sector driven innovation, encourage market-driven efficiencies, and attract external capital to priority initiatives.

“Operating out of London, Nick will work with deal teams and drive forward the foundation’s work in this area, including through engagement with co-investors and partners,” the foundation said.

“The Gates Foundation has been at the centre of innovative financing for development for more than a decade,” said O’Donohoe. “It is uniquely positioned to continue to develop innovative ways of investing philanthropic capital and I look forward to doing what I can to help catalyse investment to improve health and economic opportunities for the world’s poorest.”

Related:Sustainable Power