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UHNWs’ appetite for co-investment in private equity is on the rise

Date: 29 Apr 2015

Citywealth

Christopher Good, partner at Macfarlanes, talks about the increasing tendency of the UNHWs and family offices to co-invest into private equity.

What is your advice to families considering co-investing in a private equity deal?

Before committing to a co-investment strategy, any investor should be comfortable that its own processes are quick enough to keep up with the general partner’s (GP) transaction timetable. GPs do not tend to offer new co-investment opportunities to investors who are difficult to work with inside a tight timescale. Given the scarcity of co-investment opportunities relative to Limited Partnerships’ (LP) willingness to be involved, this means only the most dependable co-investors get picked to partner the fund on co-investments. Professional fund of funds and similar investors have this transaction experience in-house, so any UHNW or family office wishing to do co-investments needs to plan in advance how it will approach the execution challenges of a co-investment deal.

What kind of returns are there on the investments?

It is not necessarily the case that co-investments are better deals than the ones just held through the fund. The main attraction is that co-investment stakes are often charged a lower level of fee and carry than for the main fund (and are sometimes free of carry and fees altogether). This helps boost the return profile where the overall deal is profitable.

Is this a trend that you have seen a rise in?

There has been a rise in the appetite for co-investment opportunities generally and GPs willingness to arrange deals to allow co-investment with LPs, and UNHW or family offices invested into private equity are part of this.

If so, what type of private equity investments are UHNW or families in business interested investing in?

A lot of these investors are now very sophisticated LPs, and plan their investment strategy very carefully like any other institutional investor. Asides from some co-investments where personal background may play a part (e.g. technology entrepreneurs are often more comfortable co-investing in venture capital or small technology portfolio companies) these types of investors are looking at the same sorts of strategies and asset classes as the other institutional investors – for example, special opportunities, credit and direct lending funds have been particularly popular over the last 6 months.

What is the reason for this trend?

On the GP side, it is partly a function of wanting to establish closer links with LPs in the run up to a new fundraise, and as a response to the market where debt is less freely available and GPs have not necessarily been raising the larger funds that they were used to.

On the LP side, they wish to boost their return profile by increasing their stake but with lower fees and carry attached. Co-investments also often allow LPs to get closer to GPs who they think are worth supporting, which hopefully translates into a favoured position in the next fund if that fundraising is oversubscribed.

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