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Content Includes:

Importance of Co-Investments

The majority of GPs believe offering co-investments is important for fundraising success.

Offering Co-Investments

More than two-thirds of GPs surveyed currently offer co-investment rights.

Current Activity

Over half of LPs that currently have open co-investment positions have more than five.

Performance of Co-Investments

Co-investments have largely outperformed fund commitments for LPs.

Co-Investment Discounts

Most GPs offer reduced management fees and carried interest on co-investments.

Future Plans

Both GPs and LPs expect co-investment activity to remain strong.

Preqin Special Report: Private Equity Co-Investment Outlook

November 2015

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2 © 2015 Preqin Ltd. / www.preqin.com


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All rights reserved. The entire contents of Preqin Special Report: Co-Investment Outlook, November 2015 are the Copyright of Preqin Ltd. No part of this publication or any information contained in it may be copied, transmitted by any electronic means, or stored in any electronic or other data storage medium, or printed or published in any document, report or publication, without the express prior written approval of Preqin Ltd. The information presented in Preqin Special Report: Co-Investment Outlook, November 2015 is for information purposes only and does not constitute and should not be construed as a solicitation or other offer, or recommendation to acquire or dispose of any investment or to engage in any other transac-tion, or as advice of any nature whatsoever. If the reader seeks advice rather than information then he should seek an independent fi nancial advisor and hereby agrees that he will not hold Preqin Ltd. responsible in law or equity for any decisions of whatever nature the reader makes or refrains from making following its use of Preqin Special Report: Co-Investment Outlook, November 2015. While reasonable efforts have been made to obtain information from sources that are believed to be accurate, and to confi rm the accuracy of such information wherever possible, Preqin Ltd. does not make any representation or warranty that the information or opinions contained in Preqin Special Report: Co-Investment Outlook, November 2015 are accurate, reliable, up-to-date or complete. Although every reasonable effort has been made to ensure the accuracy of this publication Preqin Ltd. does not accept any responsibility for any errors or omissions within Preqin Special Report: Co-Investment Outlook, November 2015 or for any expense or other loss alleged to have arisen in any way with a reader’s use of this publication.

As private equity continues to grow as an asset class, investment structures and relationships between fund managers and investors have had to evolve and adapt. LPs’ approaches to private equity are becoming more sophisticated as their knowledge of the asset class increases, and many now frequently seek out alternative opportunities to fund investing in order to both diversify their portfolios and maximize returns. As a result, growing numbers of LPs consider co-investments an important part of their overall private equity portfolios. Direct investments, whereby LPs are co-investing alongside GPs, have increasingly become part of private equity discourse, with signifi cant interest arising from both sides. In the last year or so, Preqin has noted an increase in appetite for information relating to co-investments with a high number of incoming enquiries requesting greater insight on the subject.

In order to fi nd out more about this growing area of the asset class, we have surveyed 320 active GPs and 222 active LPs about co-investments and have examined the results to better understand the changing levels of co-investment participation among fund managers and investors, and to fi nd out their views on the perceived risks and attractions.

Half of the 222 LPs that we surveyed are either actively or opportunistically co-investing at present. Furthermore, most LPs are looking to either increase or maintain their exposure to co-investments in the future, with a number of LPs aiming to make more co-investments and to commit more capital to these types of opportunities. Similarly, GPs are recognizing how important co-investment rights are becoming to LPs; our GP survey found that most managers feel offering co-investment rights is important during fundraising (page 4). In fact, 30% of GP respondents also stated that 81-100% of LPs in their latest funds have co-investment rights included in their LPAs.

The main motivation for LPs to seek out co-investments is the prospect of greater returns and lower fees. Most LPs actively co-investing reported that their co-investments have delivered superior returns to their private equity fund commitments, with 46% stating that their past co-investments have outperformed fund investments by more than 5%, in contrast to just 3% of LPs witnessing any underperformance. The majority of GPs also reported that they charge lower management fees and carried interest on co-investment arrangements, or charge no fees at all.

Our survey suggests more and more LPs are set to seek out opportunities to make co-investments. With the fundraising environment becoming increasingly competitive and record numbers of funds in market, it is also likely that GPs will be looking to more readily offer benefi ts such as co-investment rights in order to improve their chance of a successful fundraise.

To fi nd out more about Preqin’s suite of private equity products, or for more information on co-investments, please do not hesitate to contact us at [email protected] or at our New York, London, Singapore, San Francisco or Hong Kong offi ces.

Contents

Breakdown of Survey Respondents 3

GP Perception of Co-Investments 4

GP Co-Investment Activity 5

LP Relationship 7

LP Co-Investment Activity 9

Performance of Co-Investments 11

LP Co-Investment Preferences 12

GP Relationship 14

GP and LP Co-Investment Future Plans 15

Foreword




Breakdown of Survey Respondents

18%

11%

7%

27%

12%

24%Less than $250mn

$250-499mn

$500-999mn

$1-4.9bn

$5-9.9bn

More than $10bn

LP Respondents by Assets under Management

Source: Preqin

72%

22%

5%1%

Less than $500mn

$500mn-1.5bn

$1.6-4.5bn

More than $4.5bn

GP Respondents by Size of Most Recent Fund

Source: Preqin

17%

16%

13%13%

8%

7%

5%

5%

4%4%

9%

Fund of Funds Manager

Asset Manager

Family Office

Public Pension Fund

Private Sector Pension Fund

Insurance Company

Endowment Plan

Foundation

Investment Company

Bank

Other

Breakdown of LP Respondents by Type

Source: Preqin

24%

19%

16%

16%

8%

6%

4%3% 4%

Real Estate

Buyout

Venture Capital

Growth

Infrastructure

Mezzanine

Distressed Private Equity

Natural Resources

Other

GP Respondents by Primary Investment Type

Source: Preqin

Breakdown of GP Respondents by Location

Source: Preqin

Breakdown of LP Respondents by Location

Source: Preqin

North AmericaNorth America47%47%

Rest of WorldRest of World15%15%

EuropeEurope29%29%

AsiaAsia9%9%

North AmericaNorth America48%48%

Rest of WorldRest of World9%9%

EuropeEurope35%35%

AsiaAsia8%8%

Total Number of GPs Surveyed: 320 Total Number of LPs Surveyed: 222




GP Perception of Co-Investments

Discussions on the disintermediation of private equity are becoming more common, and increasing numbers of institutional investors are considering making direct private equity investments. It therefore comes as no surprise to hear that the majority of private equity fund managers feel that it is important to offer potential investors co-investment rights when seeking new commitments and that they feel this increases the chances of a successful fundraise, as shown in Fig. 1.

In order to gain more insight into GP opinion on co-investments, we asked private equity fund managers what they perceive to be the pros and cons of offering LPs co-investment rights. Just 2% of GP respondents stated that there are no benefi ts in offering LPs co-investment rights.

Of those respondents that indicated there are advantages, three benefi ts in particular were cited by the majority of fund managers: building stronger relationships with LPs (84%), gaining access to additional capital for deals (76%) and improving the chance of a successful fundraise (55%), as shown in Fig. 2.

When asked what the downsides of offering LPs co-investment rights are, 9% of fund managers stated that there are none. Of those respondents that indicated there are negatives, the most prominent factor is the impact offering co-investment rights has on the timeline of deals; 69% of fund managers feel offering their investors co-investment rights delays the deals process (Fig. 3). Just over a quarter of respondents (26%) noted the negative impact it has on relationships with LPs that are not offered such opportunities. One North America-based private equity fi rm manages this issue by offering the transaction to its LPs on a fi rst-come fi rst-served basis.

9%

35%

39%

17%Vitally Important

Very Important

Somewhat Important

Not Important

Fig. 1: Importance of Being Open to Offering Co-Investment Rights for a Successful Fundraise

Source: Preqin Fund Manager Survey, August 2015

69%

44% 44%

26%

6%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Slo

ws

De

als

Pro

ce

ss

Diff

ere

nc

es

in t

he

Term

s o

r Rig

hts

of

Co

-Inve

sto

rs

Ad

diti

on

al

Co

sts/

Re

sou

rce

Ne

ga

tive

Imp

ac

to

n R

ela

tion

ship

sw

ith O

the

r LP

s

Oth

er

Fig. 3: Perceived Disadvantages of Offering LPs Co-Investment Rights


Pro

po

rtio

n o

f GP

Re

spo

nd

en

ts84%76%

55%

29% 27%

16%

1%0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Build

a S

tro

ng

er

Re

latio

nsh

ip w

ith L

Ps

Ga

in A

cc

ess

to

Ad

diti

on

al C

ap

ital

for

De

als

Imp

rove

th

eC

ha

nc

e o

f a

Suc

ce

ssfu

l Fu

nd

rais

e

Ben

efit

s to

th

eP

ort

folio

Co

mp

an

y

Op

po

rtu

nity

to

Bett

er M

an

ag

e R

isk

Op

po

rtu

nity

to

Enh

an

ce

Pro

du

ct

Diff

ere

ntia

tion

Oth

er

Fig. 2: Perceived Benefits of Offering LPs Co-Investment Rights


Pro

po

rtio

n o

f GP

Re

spo

nd

en

ts

Private Equity Online

Private Equity Online is Preqin’s fl agship online private equity information resource.

Constantly updated by our team of dedicated researchers, Private Equity Online represents the most comprehensive source of industry intelligence available today, with global coverage and a wide variety of information included.

For more information, please visit:

www.preqin.com/privateequity




GP Co-Investment Activity

GP Offerings

More than two-thirds (69%) of the GPs surveyed offer co-investment rights to their private equity fund investors, and a further 18% are considering doing so in the future (Fig. 4). Less than 1% of respondents had offered co-investments in the past but do not offer them any longer. This reinforces the prevalence of co-investments, and the sustained, or even increasing, appetite that is apparent in the private equity industry for these direct investment types.

Syndicated co-investments, whereby a GP sells down a portion of equity to select LPs after the deal has been completed, are the most prevalent type of co-investments that fund managers offer their investors, stated by 74% of GP respondents (Fig. 5). Only 16% offer a co-sponsorship model, requiring a signifi cant level of due diligence from LPs at an early stage in the deals process. An even smaller proportion offer the opportunity for LPs to co-lead (13%), where the investor will contribute a similar share to the fund manager and has a leading role in deal origination. It is noteworthy that these latter two options, which allow LPs more active roles alongside GPs, are the least prevalent.

Fig. 6 shows the typical stage in the investment cycle at which fund managers offer co-investment rights to LPs. Thirty-eight percent of GPs offer these opportunities at more than one stage in the process. The most common point at which investors are offered co-investment rights is during the fundraising process or during the bid for deals. It is rarer for GPs to offer them at fi nal close of the fund, with only 7% of respondent fund managers doing so.

Co-Investment Activity in 2014 and H1 2015

In order to track the changes and developments in the private equity co-investment space, we asked fund managers about their activity in 2014 compared to H1 2015, with the results clearly illustrating the growth in co-investments in a relatively short period of time. Fig. 7 demonstrates that GPs are generally offering an

increasing proportion of their LPs co-investment opportunities; between 2014 and H1 2015, the proportion of fund managers offering 0-30% of their LPs co-investment opportunities has dropped, and in turn, the proportion offering these opportunities to more than 80% of their investors has risen considerably. In 2014, 11% of GPs were offering more than four out of fi ve LPs co-investments; this has risen to 26% in H1 2015.

However, there appears to be some disparity in the proportion of LPs approached with co-investment opportunities and those that actually ended up committing to such transactions with the GP. Fig. 8 shows that, surprisingly, the greatest proportion of GPs (40%) stated that none of the LPs they offered co-investment opportunities to in H1 2015 took them up, an increase from 29% in 2014.

Generally LP co-investors would make up less than 50% of the equity in a deal; however, the proportion of GPs that indicated their LP co-investors contributed over half of the equity in private

69%

18%

0%

13%

Offer Co-InvestmentRights

Considering OfferingCo-Investment Rights

Previously Offered Co-Investment Rights butDo Not Anymore

Do Not Offer Co-Investment Rights

Fig. 4: Proportion of GPs Offering Co-Investment Rights to Their LPs


58%

46%

23%

16%

7%

0%

10%

20%

30%

40%

50%

60%

70%

Du

ring

Fun

dra

isin

gP

roc

ess

Du

ring

Bid

fo

rD

ea

l

Po

st-D

ea

lC

om

ple

tion

Pre

-Ma

rke

ting

of

Fun

d

At

Fin

al C

lose

of

Fun

d

Fig. 6: Typical Stage in Investment Cycle at Which GPs Offer Co-Investment Rights to LPs


Pro

po

rtio

n o

f G

P R

esp

on

de

nts

74%

27%

16%13%

2%0%

10%

20%

30%

40%

50%

60%

70%

80%

Syn

dic

ate

dC

o-In

vest

me

nt

Co

-Un

de

rwrit

e

Co

-Sp

on

sor

Co

-Le

ad

Oth

er

Fig. 5: Types of Co-Investment Opportunities GPs Offer LPs


Pro

po

rtio

n o

f G

P R

esp

on

de

nts




40%

18%

21%

5%

5%

7%

1%

4%

29%

35%

13%

10%

5%

1%

4%

4%

0% 10% 20% 30% 40% 50%

0%

1-10%

11-20%

21-30%

31-40%

41-60%

61-80%

81-100%

2014

H1 2015

Fig. 8: Proportion of LPs Offered Co-Investment Opportunities that Actually Ended Up Co-Investing with the GP, 2014 vs. H1 2015

Source: Preqin Fund Manager Survey, August 2015Proportion of GP Respondents

Pro

po

rtio

n o

f LP

s O

ffe

red

Co

-Inve

stm

en

t

25%

12%

22%

6%

13%

23%

24%

24%

22%

11%

7%

11%

0% 10% 20% 30%

1-10%

11-19%

20-29%

30-39%

40-49%

50% orMore

2014

H1 2015

Fig. 9: Proportion of Equity from LP Co-Investors in Deals, 2014 vs. H1 2015

Source: Preqin Fund Manager Survey, August 2015Proportion of GP Respondents

Pro

po

rtio

n o

f Eq

uity

69%

81%

63%67%

57%

73% 73%

83%

61%

20%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Less

th

an

$50m

n

$50-

99m

n

$100

-49

9mn

$500

-99

9mn

$1b

no

r Mo

re

2014

H1 2015

Fig. 10: Size of Deals Completed that Included LP Co-Investors, 2014 vs. H1 2015

Source: Preqin Fund Manager Survey, August 2015Deal Size

Ave

rag

e P

rop

ort

ion

of

De

als

Inc

lud

ing

LP

Co

-Inve

sto

rs

23%

14%

14%

6%

5%

6%

5%

26%

25%

20%

21%

8%

3%

5%

7%

11%

0% 5% 10% 15% 20% 25% 30%

0%

1-10%

11-20%

21-30%

31-40%

41-60%

61-80%

81-100%

2014

H1 2015

Fig. 7: Proportion of LPs Offered Co-Investment Opportunities by GPs, 2014 vs. H1 2015


Proportion of GP Respondents

Pro

po

rtio

n o

f LP

s O

ffe

red

Co

-Inve

stm

en

t

equity deals rose from 11% in 2014 to 23% in H1 2015 (Fig. 9). Conversely, the proportion of GPs that had their co-investing LPs committing 11-19% of the equity for deals halved from 24% in 2014 to 12% in H1 2015.

Size of Co-Investment Deals

Fig. 10 shows the average proportion of deals completed in 2014 and H1 2015 that included LP co-investors by deal size. The overall trend is that smaller deals (those less than $500mn in size) are more likely to include an LP co-investor. Our survey results show that there have been slight changes within each size

bracket moving from 2014 to H1 2015, with the most notable shift in the category of deals worth $1bn and over. Of all $1bn+ private equity deals completed by the GP respondents in 2014, 57% of these included LP co-investors, compared to just 20% in 2015.

Data Source:

Preqin’s Fund Manager Profi les has extensive information for over 9,300 active private equity fi rms worldwide. Detailed profi les include total capital raised in the last 10 years, estimated dry powder, number of portfolio companies, investment preferences and much more. Plus, access direct contact information for key decision makers.

For more information, please visit: www.preqin.com/fmp




LP Relationship

Preqin’s survey results highlighted the differing experiences GPs have when co-investing with LPs. For example, the largest proportion (45%) of fund managers stated that the additional capital co-invested by their LPs typically equates to 1-20% of the LP’s original fund commitment (Fig. 11). However, for 9% of GP respondents, the additional capital equated to 100% or more of their LPs’ original fund commitments.

There can be a number of prerequisites for investors when qualifying for co-investment rights. Over half (53%) of fund managers indicated that the speed at which the LP can evaluate and agree to co-investment is of high importance (Fig. 12). The competitive bidding process and the fact that several co-investors may be waiting on one another’s decisions means that there is some pressure on timing, with GPs often looking for a verbal commitment from LPs within as little as two to three weeks.

The size of fund commitments is of relative signifi cance, highlighted by two in fi ve GPs, while 35% of fund managers have

requirements relating to LP reliability and 33% call for previous expression of interest in order to qualify for co-investment rights. Twenty-six percent of fund managers have no requirements at all and will offer co-investment opportunities to all LPs.

Despite the widely reported appetite for co-investment in today’s private equity industry, GPs are fi nding that only a certain proportion of their LPs are actually requesting rights to invest alongside them. The largest share of respondents (41%) stated that only up to 20% of LPs in their most recent fund requested co-investment rights (Fig. 13). On the other hand, 11% of GPs surveyed had over 80% of their most recent LPs do so.

The LPA outlines a number of key provisions in a private equity fund and it is not uncommon for these legal documents to contain clauses on co-investment rights. The largest proportion of fund managers (30%) stated that 81-100% of LPs in their most recent fund had co-investment rights included in their LPA, as shown in Fig. 14.

53%

40%35% 33%

29%26%

3%

0%

10%

20%

30%

40%

50%

60%

Spe

ed

at

Wh

ich

LP C

an

De

cid

eo

n C

o-In

vest

me

nt

Size

of

Fun

dC

om

mitm

en

t

LP R

elia

bili

ty

Pre

vio

us

Exp

ress

ion

of

Inte

rest

inC

o-In

vest

me

nts

LP B

ite-S

ize

Re

qu

irem

en

ts

No

Re

qu

irem

en

ts,

Off

ere

d t

o A

ll LP

s

Oth

er

Fig. 12: Requirements for Investors to Qualify for Co-Investment Rights


Pro

po

rtio

n o

f GP

Re

spo

nd

en

ts

21%

14%

15%8%

2%

9%

1%

30%

0%

1-10%

11-20%

21-30%

31-40%

41-60%

61-80%

81-100%

Fig. 14: Proportion of LPs in Most Recent Fund to Have Co-Investment Rights Included in LPAs


41%

24%

20%

3%

11%0-20%

21-40%

41-60%

61-80%

More than 80%

Fig. 13: Proportion of LPs in Most Recent Fund to Request Co-Investment Rights


45%

20%

15%

4%

6%

9%

1-20% of FundCommitment





More than 100% ofFund Commitment

Fig. 11: GPs’ Observations of Additional Capital Typically Co-Invested Alongside Fund Commitments by Their LPs


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LP Co-Investment Activity

According to Preqin’s latest investor survey on co-investments, half of all LPs are actively, or opportunistically, co-investing alongside private equity fund managers at present (Fig. 15). This is in addition to 22% that are considering co-investing, having not done so before. This indicates that the vast majority of LPs have faith in co-investments and see the investment structure as an attractive way to access the asset class, with only 27% of LPs not looking to co-invest at the moment. For those LPs that have never co-invested and with no future plans to co-invest, there seems to be very little pattern in either location or aggregate assets under management (AUM), with these LPs spread globally and with varying sizes of AUM.

Of the investors that have at least one open co-investment position, the largest proportion (25%) currently hold between three and fi ve open co-investment positions, with 68% of LPs holding between one and 10 positions (Fig. 16). Six percent of LPs with open positions currently hold over 50 co-investments alongside their private equity fund commitments. As co-investments increase in prevalence, this number is likely to rise as LPs become more confi dent and sophisticated in direct investing.

Of the LPs surveyed, the average range for private equity co-investments per position is $2-10mn. Many LPs seem to co-invest in a similar range to this, with the exception of some larger LPs that are willing to commit hundreds of millions of dollars to a single co-investment position, and in one respondent’s case, up to $1bn. According to Preqin’s investor survey, the majority (63%) of LPs that are co-investing alongside their fund commitments only invest between 1% and 20% of their initial stake in the fund via co-investment positions (Fig. 17). Thirty percent of LPs typically commit between 21% and 100% to co-investment positions, while 7% commit more to co-investments than their entire stake in the original fund. Unsurprisingly, all LPs in this 7% are looking to increase their level of co-investment in

the future, and cite superior returns as a major perceived benefi t of co-investing.

As shown in Fig. 18, over half (59%) of the LPs surveyed by Preqin confi rmed that they take a ‘selective follower’ approach to co-investing, meaning that the LP undertakes signifi cant, independent due diligence on deals, but at a later stage in the process, and decides on a deal-by-deal basis whether or not to invest in each opportunity. This was by far the most common response from co-investing LPs, ahead of ‘passive followers’ (27%), which sees LPs perform some due diligence, although investors often commit to a co-investment opportunity regardless. Just 10% of LPs opt to ‘co-lead’ co-investment deals, whereby the LP takes on a leading role in origination and the wider co-investment process. Co-lead opportunities may be few and far between however, with many GPs unwilling to offer

26%

24%22%

3%

24%

Actively Co-Investing

Opportunistically Co-Investing

Have Not Co-InvestedPreviously, Will Consider inFuture

Have Co-Invested Previously,But No Future Plans

Never Co-Invested, No Plansto Co-Invest in Future

Fig. 15: Breakdown of LPs by Current Co-Investment Activity

Source: Preqin Investor Survey, September 2015

21%

25%

22%

12%

15%

6%1-2

3-5

6-10

11-20

21-50

More than 50

Fig. 16: Current Number of Open Co-Investment Positions Held by LPs


63%

21%

3%

1% 5%7%






More than 100% ofFund Commitment

Fig. 17: Additional Capital Typically Co-Invested Alongside Fund Commitments by LPs





such a level of control to LPs. Furthermore, such a demanding role may not be a viable option for those investors lacking in experience or resources.

The potential for better returns and the attraction of lower fees seem to be the driving forces behind the majority of surveyed LPs deciding to opt for co-investments. As seen in Fig. 19, 67% of LPs believe that co-investing can lead to greater returns than those delivered by standard private equity fund arrangements. Additionally, 61% of investors are attracted to the prospect of lower fees charged on co-investment commitments, as detailed further on page 14. Interestingly, a third of LPs believe that co-investing provides them with more control over investments and 31% of LPs stated a desire to invest in a particular portfolio company, highlighting that institutional investors increasingly want to become more involved at a portfolio company level.

In contrast, LPs that do not co-invest, and have no plans to co-invest, seem to suggest that a lack of resources available to them is the prime reason for not committing to co-investment opportunities (Fig. 20). Surprisingly, these responses are not solely from smaller sized LPs, with a number of such respondents managing assets in excess of $10bn. Furthermore, almost a fi fth of respondents stated that they do not look to co-invest as it would reduce their level of diversifi cation, leaving them overexposed to certain deals by committing additional

capital to the same portfolio company. A very small 3% of LPs actually cited returns being too low as a reason for not currently co-investing, which is in contrast to the results shown in Fig. 19 and Fig. 22 that LPs at large reap the benefi ts of outperforming co-investments.

59%

27%

20%16%

10%

2%0%

10%

20%

30%

40%

50%

60%

70%

Sele

ctiv

eFo

llow

er

Pa

ssiv

eFo

llow

er

Co

-Un

de

rwrit

e

Co

-Sp

on

sor

Co

-Le

ad

Oth

er

Fig. 18: LP Approaches to Co-Investments


Pro

po

rtio

n o

f LP

Re

spo

nd

en

ts

67%61%

40%34%

31%23%

6%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Bett

er R

etu

rns

Low

er F

ee

s

Stre

ng

the

n G

PR

ela

tion

ship

s

Mo

re C

on

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s

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in K

no

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dg

eo

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cto

r

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er

Fig. 19: LPs’ Perceived Benefits of Co-Investing


Pro

po

rtio

n o

f LP

Re

spo

nd

en

ts

35%

19% 19%

8%5%

3% 3%

8%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Lac

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eso

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ive

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t In

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art

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Leg

al

Re

stric

tion

s

Re

turn

sTo

o L

ow

Allo

ca

tion

Too

Sm

all

Oth

er

Fig. 20: LPs’ Reasons for Not Co-Investing


Pro

po

rtio

n o

f LP

Re

spo

nd

en

ts

No

t C

o-In

vest

ing

Data Source:

Preqin’s Investor Intelligence is the leading source of information on institutional investors in private equity funds worldwide, with more than 6,000 limited partners of all types profi led and regularly updated following direct communication with our dedicated team of multilingual analysts.

Our online database of private equity investors lists all institutions actively investing in the asset class and includes detailed and up-to-date information about their plans for future investments.


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Performance of Co-Investments

The most common response for perceived benefi ts of co-investing from an LP perspective was the prospect of better returns, so naturally investors will be anticipating a notable outperformance from co-investments compared with their traditional private equity fund commitments. As shown in Fig. 21, of those LPs surveyed, 36% expect co-investments to outperform private equity fund returns by more than 5%. This seems like a realistic target too, with Fig. 22 showing that LPs have been seeing greater returns in their past co-investment positions when compared with their private equity fund commitments.

For the majority of LPs that have seen co-investment positions produce positive returns, there has been a notable level of outperformance when compared to private equity fund returns. Eighty percent of LPs have acknowledged an outperformance, with 46% witnessing returns that are over 5% greater than those in the standard private equity fund arrangements. In contrast, only 3% of LPs have witnessed an underperformance. It is worth mentioning that many LPs responded stating that it was too early to tell in regards to co-investment returns, showing that the co-investment structure remains a relatively new, albeit growing, way of committing to the private equity asset class.

3%0% 0%

17%14%

20%

46%

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10%15%20%25%30%35%40%45%50%

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Underperformed PE FundReturns

Outperformed PE FundReturns

Fig. 22: Performance of Past Co-Investments Compared to Private Equity Fund Returns


Pro

po

rtio

n o

f LP

Re

spo

nd

en

ts

30%

34%

36%

Outperforming PE FundReturns by up to 2.5%

Outperforming PE FundReturns by 2.6% to 5%

Outperforming PE FundReturns by 5.1% andover

Fig. 21: LPs’ Level of Desired Outperformance of Co-Investment


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LP Co-Investment Preferences

When examining areas of the market LPs consider investing in, LPs’ co-investment preferences are relatively similar to traditional investment preferences. The majority of surveyed LPs aim to focus on small to mid-market buyouts when considering investing alongside fund managers in a co-investment, which was the most commonly cited fund type (Fig. 23). Interestingly though, Preqin Investor Outlook: Private Equity, H2 2015 shows that only 11% of LPs were looking to commit to growth funds over the next 12 months; this is compared with over half (52%) of LPs surveyed that would consider investing alongside growth funds, the second largest proportion for any fund type. Over a third (36%) of respondents indicated that they would take an opportunistic

approach to choosing which fund types to invest alongside, indicating that co-investing is often done on a deal-by-deal basis, with the majority of LPs acting as selective followers, as seen previously (Fig. 18).

Generally, LPs are targeting co-investment opportunities in the regions that they would target with standard private equity commitments, as shown in Fig. 24. Seventy-two percent of LPs surveyed will target North America for co-investment opportunities, followed by Europe at 62%. Interestingly, only 30% of LPs surveyed are looking to target Asia for co-investment opportunities, lower than Rest of World (40%).

40%

30%

62%

72%

0% 20% 40% 60% 80%

Rest of World

Asia

Europe

North America

Fig. 24: LP Preferences for Co-Investments by Region

Source: Preqin Investor Survey, September 2015Proportion of LP Respondents

3%

13%

19%

20%

23%

29%

32%

34%

52%

77%

0% 20% 40% 60% 80% 100%

Other

Cleantech

Turnaround

Distressed Debt

Mezzanine

Large to Mega Buyout

Special Situations

Venture Capital

Growth

Small to Mid-Market Buyout

Fig. 23: LP Preferences for Co-Investments by Fund Type

Source: Preqin Investor Survey, September 2015Proportion of LP Respondents

Fig. 25: Notable Institutional Investors that Co-Invest

Saudi Economic & Development Company Investment CompanyLocation: Saudi Arabia Total Assets: $3bn Target PE Allocation: 22% of Total Assets Current PE Allocation: 22% of Total Assets

Saudi Economic & Development Company (SEDCO) actively targets co-investment opportunities and it allocates 5% of its total assets (25% of its private equity portfolio) to direct and co-investment opportunities. It does not take a stake in a company larger than 20% and looks to make four or fi ve co-investments annually. The investment company typically commits between $10mn and $50mn to a fund in order to receive co-investment opportunities. SEDCO co-invests globally and it will consider all industry sectors and investment types, excluding venture capital. It co-invests predominantly with existing managers in its portfolio and also some GPs it has not previously worked with.

Netherlands Development Finance Company (FMO) Government AgencyLocation: Netherlands Total Assets: €7.1bn Target PE Allocation: 25% of Total Assets Current PE Allocation: 25% of Total Assets

Netherlands Development Finance Company (FMO) made its fi rst co-investment alongside a GP in 1998 and dedicates approximately 33% of its private equity investments to direct and co-investments. It typically makes between 10 and 15 co-investments annually, committing €5-25mn to each opportunity. As with its other private equity commitments, FMO’s co-investments must be focused on emerging markets. It has a strong preference for fi nancial services, renewable energy, affordable housing and agribusiness services.

Employees’ Retirement System of Texas Public Pension FundLocation: US Total Assets: $26.2bn Target PE Allocation: 10% of Total Assets Current PE Allocation: 10% of Total Assets

Employees’ Retirement System of Texas (ERS) launched a co-investment program in September 2011. It typically commits between $10mn and $20mn per co-investment and seeks such opportunities alongside existing GPs in its portfolio. ERS will consider all geographical regions and industry sectors, and is particularly keen on co-investing in buyout and growth opportunities. From August 2015, Employees’ Retirement System of Texas was looking to commit between $900mn and $1bn to between six and 10 new private equity funds and co-investment opportunities over the next 12 months.

California Public Employees’ Retirement System (CalPERS) Public Pension FundLocation: US Total Assets: $286.4bn Target PE Allocation: 10.27% of Total Assets Current PE Allocation: 10% of Total Assets

California Public Employees’ Retirement System (CalPERS) is an active co-investor, regularly seeking co-investment opportunities alongside the GPs it invests with. It is known to have previously co-invested alongside several of its fund managers, gaining exposure to buyout, distressed debt and natural resources deals. During 2015, CalPERS committed to TCP II Co-Invest B, a co-investment fund set up solely for the retirement system to co-invest alongside Tailwind Capital Partners II. The fund is focused on making control-oriented investments in the lower end of the middle market in the US. CalPERS also allocated capital to co-invest alongside Blackstone Group and Wigmore Capital.

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GP Relationship

As seen previously, GPs have stated that a key advantage of offering co-investment opportunities to LPs is the opportunity to build stronger relationships with investors. With increasing LP appetite for co-investments, such a structure may continue to become more prevalent as GPs look to maintain a rapport with their investors. Seventeen percent of LPs surveyed insist on being offered co-investment rights, as shown in Fig. 26, with 29% sometimes insisting on such privileges. Many LPs do not press for co-investment rights but GPs should be aware that this may change in the future as co-investments continue to grow in prominence.

In addition, LPs may ask for special requirements when offering further capital for co-investments alongside fund managers. While the majority (55%) of LPs do not require any special provisions, a third of investors surveyed noted that they insist on special fees, as well as a fi fth insisting on board representation at portfolio company level (Fig. 27). The fee structure of co-investments seems to be a key consideration for LPs, not only as a motivation for making co-investments but also as a defi nite requirement before agreeing to commit to co-investments.

The results of our survey indicate that co-investments do tend to come with lower fees than those seen in the usual private equity fund arrangements, as shown in Fig. 28. Almost half (49%) of GPs offer co-investment opportunities with no management fee, with an additional 36% providing a reduced level of management fee to LPs. A similar trend is seen for carried interest rates too. Forty-eight percent of co-investments charge no carried interest, whereas just a quarter of such arrangements have the same level of carried interest charged as on a standard private equity fund commitment. More often than not, LPs are seeing reduced and more favourable fee arrangements on their co-investment commitments when compared to their fund commitments.

These lower fees are only benefi cial if LPs are granted access to co-investments, but LPs are often not given these co-investment rights; only 21% of LPs stated that they gained access to the co-investments they requested every time. Most LPs get access some of the time (54%), but a quarter of LPs confi rmed that they rarely, or never, get offered the opportunity to co-invest after requesting them. Somewhat surprisingly, these LPs that fail to secure rights to co-investment opportunities do not tend to be smaller in size or of a particular type.

17%

29%

6%

47%

Always Insist

Sometimes Insist

Rarely Insist

Never Insist

Fig. 26: Proportion of LPs Insisting on Co-Investment Rights when Committing to a New Fund


55%

33%

19%15%

9%

0%

10%

20%

30%

40%

50%

60%

No

Sp

ec

ial

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en

ts

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l Fe

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Boa

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tion

Sea

t o

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om

mitt

ee

Oth

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Fig. 27: LPs’ Co-Investment Requirements


Pro

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f LP

Re

spo

nd

en

ts

49%

36%

16%

48%

27%25%

0%

10%

20%

30%

40%

50%

60%

No Fee ReducedFee

Same Fee No Carry ReducedCarry

SameCarry

Management Fees Carried Interest

Fig. 28: Discounts Offered to Co-Investing LPs Compared to Usual LP Fund Commitment


Pro

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f G

P R

esp

on

de

nts




GP and LP Future Co-Investment Plans

GP Future Plans

Our GP survey results confi rm that the private equity industry is likely to see an increased fl ow of co-investment activity, with 34% indicating that they intend to offer more direct investment opportunities to their LPs in the year ahead compared with 2014, as shown in Fig. 29. Only 3% are looking to reduce the number and 44% will offer the same amount.

LP Future Plans

As shown in Fig. 30, LPs’ involvement in co-investing is likely to rise further, with almost half (49%) of the LPs surveyed anticipating an increase in their co-investment activity in the future. This is in contrast to just 2% of LPs that are looking to decrease their co-investment activity, with almost a quarter (23%) aiming to maintain current levels. With record levels of dry powder and increasing concerns over valuations and returns, co-investments offer LPs a way to take more control of their portfolios.

The average range in the number of new co-investments LPs aim to make in the coming 12 months stands at between two and fi ve. That said, the most common response was for LPs to opt to make one to three new co-investment commitments in the next year. LPs seem to be steadily increasing their exposure to private equity co-investments as they become more comfortable with the structure, investing in a few opportunities to complement their private equity fund commitments.

Over the next 12 months, on average, LPs are looking to commit between a minimum of $8mn and a maximum of $27mn to co-investment opportunities. The most common response from LPs was to commit between $10mn and $20mn to co-investments over the coming year, with the exception of some larger LPs that are looking to allocate between $200mn and $500mn to co-investment opportunities in the next year.

49%

23%

2%

26%

Increase Co-Investment Activity

Maintain Level of Co-Investment Activity

Decrease Co-Investment Activity

Uncertain on FutureCo-Investment Plans

Fig. 30: LPs’ Future Co-Investment Plans


34%

44%

3%

19%

Offer MoreOpportunities

Offer Same Number ofOpportunities

Offer FewerOpportunities

Uncertain

Fig. 29: GPs’ Future Co-Investment Plans


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Preqin Special Report: Private Equity

Co-Investment Outlook

November 2015

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