US Private Equity Firms & Equity Co-Investments: The Link


Equity co-investments are minority investments made by private equity investment professionals, alongside a venture capital firm or a PE fund manager. Equity co-investment allows private equity investors to get themselves indulge into prospective profitable investments with no need to pay the concerned fees that’s get charged by PE funds.

The co-investment option is restricted to big institutional investors who maintain a great relationship with the PE fund managers. On the contrary, retail and smaller investors are not allowed to invest, as it will infringe the general guidelines predetermined for equity co-investments.

Going In-Depth Into Equity Co-Investments

As per a study conducted by Prequin, a reputed multi-national market-research firm that provides for financial data on the alternative assets market, 80% of global limited partners reported an enhanced performance with equity co-investments, in comparison to investing in conventional fund structures.

While investing in a typical equity co-investment fund, the investors are supposed to pay a general partner, or a fund sponsor, with whom the wealthy investor shares a well-structured private equity partnership. The partnership guidelines further elaborate on how the general partner will allocate the capital, and how it will diversify the linked assets. Co-investments generally, refrain from getting into typical LPs (limited partnership) and general funds, and they do so, by investing directly into companies.

As a matter of fact, the more the number of investments in the equity co-investment deals, the more would grow the PE sector, and in proportion, will get created, the new private equity jobs. Especially, in the current economic situation, there will be more private equity careers that will be saved, if there happens more number of co-investment deals in the PE sector.

Why Do Limited Partners Seek Increased Co-Investments?

According to McKinsey, the world renowned consulting firm – the monetary value of co-investment deals has multiplied two-folds since 2012, currently amounting to a whopping $104 billion. The number of limited partners dealing in co-investments that are backed by the US private equity associations, have risen from 42% to 55% in a period of five years. However, limited partners that were investing directly into companies have gone up by only 1%, from 30 to 31, in the same duration.

Why Are General Partners Attracted to Co-Investments?

General partners, at US private equity firms, however seem to lose fees money, and also, it looks like they are giving up a significant amount of control on the funds while spending in co-investments, but in reality, they get to avoid monetary exposure limitations by offering co-investments.

Let’s discuss an example scenario to understand the above-stated point. Imagine a scenario or circumstance, wherein a USD 500 million fund can be allocated to choose three business entities valued at USD 300 million. The partnership deal can limit the fund investments to USD hundred million, which would imply that the firms would benefit by USD 200 million for each of the two companies. In case, a new opportunity presents itself that is merged with an enterprise value of $350, the general partner, in that scenario, would be required to look for funding from outside the fund structure, as it would only be allowed to invest a maximum of $100 million directly.

Nuances Attached With Co-Investments

It’s true that co-investing has its glaring advantages in the private equity dealmaking, but before conforming to it, a co-investor must read and understand the fine print. The most crucial aspect of these deals is the non-availability of clearly-defined fee structure.

The U.S. private equity firms, never provide for much details regarding the fee they will charge on limited partners. In many cases pertaining to co-investing, the hidden charges get found at a later stage, as there exist little to no transparency, when it comes to fee structure. For instance, one might get charged of the monitoring fee that amounts to several million U.S. dollars.

Parting Words

Equity co-investments do offer big benefits to limited partners in the form of well spiked-up capital for their monetary funds. Also, there is less risk involved while the wealthy investors benefit from diversifying the portfolios, and building robust relationships with the experienced PE investment professionals.

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