Co-investment strategies for institutional investors
Enhance your portfolio with co-investments
Co-investments offer several potential benefits such as lower fees, improved net returns, accelerated capital deployment (or J-curve mitigation) and diversification. They also provide the ability to control industry sector and geographic exposures directly, something that is more limited in primary private equity investing due to the blind-pool nature of traditional private equity funds.
However, equity co-investments also come with risks and other considerations that differ from private market fund investing. Our co-investments primer helps clients better understand the potential benefits, risks, implementation approaches and critical factors for considering co-investments.
We have extensive experience working in the co-investments market both as a consultant and as a general or limited partner. We can leverage this experience, our global scale and established relationships to help you define a strategy aligned to your needs, source new deals and undertake due diligence reviews to help guide your decision making.
Five common co-investment approaches
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Internally managed, with dedicated staffAn internally managed co-investment programme is the most cost-efficient option but also the most resource intensive. It requires an in-house dedicated co-investment team with the specialised skills needed to perform all necessary functions and established processes.
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Internally managed with guidance from an adviserA dedicated external resource assists your internal staff with due diligence, but, ultimately, you make the final investment decision. This is a lower-cost option in most circumstances, but it does require you to have your own general partner (GP) relationships and established internal decision-making processes to be able to move quickly when opportunities arise.
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Third-party co-investment manager/co-investment fundBy investing in a third-party manager’s dedicated co-investment fund, investors can access co-investments with low administrative burden and internal resource requirements. However, this route includes an additional layer of fees for the external manager and does not give you discretion over investment decisions or the ability to tailor your portfolio.
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Fund-of-one or separately managed account
You can create a fund-of-one or separately managed account (SMA) with a manager that has a co-investment team to source, screen, execute and monitor co-investments on your behalf. Compared to commingled co-investment funds, SMAs provide you with the ability to more closely align your co-investments with your wider investment strategy.
You can set forth the objectives of the co-investment programme (capital deployment pace, expected return, risk levels) and constraints (deal size, permitted geographies and industries) and determine your level of discretion over investment decisions, while having an external resource manage the vehicle and oversee the process.
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Overage or co-investment vehicles with manager
This method involves investing in a “sidecar” vehicle alongside a main private equity fund, managed by the same GP. This allows you to take an additional stake in certain portfolio companies on top of an allocation to the main fund.
This option typically has advantageous fees, but you must rely on the manager to make the investment decisions and the investments are limited to the companies that are brought into the main portfolio.
Key considerations for co-investments
Sourcing co-investment deal flows requires broad and deep relationships with general partners (GP) to remain selective and diversify a co-investment programme accordingly.
We take a proactive approach with GPs to continuously source co-investment opportunities across strategies, industries and geographies. We have an established network of active private equity GPs and sit on many Limited Partner Advisory Committees (LPACs).
We focus on co-investing alongside highly rated GPs in transactions that are squarely in line with the GP’s capabilities and historical successes. We strive to be an important and valued firm to our GP’s, which we believe is a critical element in sourcing and accessing attractive equity co-investment opportunities.
The skills required to evaluate a co-investment are different than those required to evaluate a fund investment. When determining your approach, it's important to consider your depth of resources and team’s skillset to source and evaluate opportunities and execute transactions in a shorter time frame.
Co-investments generally require quicker decision making than fund investments; dedicated resources and efficient approval processes are therefore important to support unpredictable workloads and rapid transaction timelines.
Our breadth and depth of experience in private markets and co-investments, supported by efficient and effective commercial, legal and tax review processes, strengthen our ability to identify and evaluate transactions and execute within the GP's expectations and timelines.
Our systematic co-investment due diligence and decision making process incorporates broader members of our global private markets investment team to provide the appropriate experience for evaluating co-investment opportunities across strategies and geographies. This framework seeks to control for risk while allowing for effective execution and oversight.
Why clients choose us for co-investments
We have developed an extensive global network of longstanding relationships with highly-rated GPs and have positioned ourselves as a trusted firm.
We take a proactive approach with GPs to continuously source and access co-investment opportunities across strategies, sectors and geographies.
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Experienced teams and tested processesOur specialised private markets and dedicated co-investments teams have the depth and breadth of experience necessary to source and access these co-investment opportunities. This experience is supported by efficient and effective commercial, legal and tax review processes that strengthen our ability to identify and evaluate transactions and execute within the GPs’ expectations and timelines.
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Truly global co-investment sourcing capabilitiesWe have an extensive global network of longstanding relationships with highly rated GPs from which we source co-investment deal flow.
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Flexible approach to workingOur dedicated team of experienced co-investment professionals can help you determine the right approach for implementing co-investments in your private markets programme. We take a flexible approach to working with clients, offering various levels of co-investment support, commingled offerings and customised solutions to meet your specific needs.
Your introduction to co-investments
Our experience in alternative investments*
US$164 billion in global alternatives assets under advisement
US$26 billion in global alternatives under management
240 alternatives professionals
30 years' experience in private markets
27 offices globally
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This content on this website is provided for informational purposes only and should not be taken as advice or recommendation to buy or sell any specific investment product or services, including Mercer’s investment management services, or to enter into any portfolio management mandate with Mercer.
Any investment carries inherent risks and you should carefully consider your own investment objectives, financial situation, and needs before making any investment decision.
Past performance is not an indication of future performance.