Co-investment trends: What we're seeing

I had an enjoyable discussion with Bloomberg’s Swetha Gopinath last week, about the role of co-investments in private equity transactions and co-investment trends we’re seeing. 

Co-investment arrangements have been a large part of private equity deals for a number of years – it’s a useful tool for PE funds (giving access to additional capital and allowing them to target larger deals) and for their LPs (allowing them to take an active decision in whether to invest further in specific opportunities and commonly having reduced fees). 

In 2021, 2022 and so far in 2023 we have seen an increase both in deals involving co-invest and also often the proportion of overall funding that co-investment represents. One of the drivers for this has been the tough credit market and higher interest rates – in an environment where leverage multiples you can obtain on your debt financing are more depressed than the multiple of your purchase price, co-investment can help bridge the gap of what would otherwise be a large equity cheque for a sponsor. 

Part of the increase is also a natural follow-on from the terms LPs have been obtaining in fund-raising over the last few years – requiring direct co-investment opportunities when they make their primary fund investment (often on a no-fee-no-carry basis) – the LPs now have these rights they negotiated and are not reticent in using them. A number of LPs who frequently co-invest have also built deep relationships with the sponsors they are investing alongside – they have precedent forms and side letters with that sponsor (that speed up the process) and will often understand their approach to diligence and their relevant industry knowledge.

Whilst entities can have markedly different approaches, a number of co-investors are now happy for their co-investment roles in transactions to be more visible – and there are some who actively want to be more visible – both in terms of public recognition of their role, but also in how active they are in managing the investment – potentially with a board seat and certain reserved matters.

A number of co-investors, including sovereign wealth funds, have a bench of experienced deal professionals across different markets – including those with specific sector-focus – which means that they can often seek to play a more active role in the investments they are making and can have a lot of relevant expertise to offer the investment. For those co-investors who like a more active role, whether that is viable ultimately depends on co-investment stake size.