Why are co-investments becoming so prominent in the world of private equity? The performance of co-investments is analysed in this extract from the recently released Preqin Special Report: Private Equity Co-Investment Outlook, which draws upon a survey of 320 active GPs and 222 active LPs.
The most common response for perceived benefits 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 1, of those LPs surveyed, 36 per cent expect co-investments to outperform private equity fund returns by more than 5 per cent. This seems like a realistic target too, with Fig 2 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 per cent greater than those in the standard private equity fund arrangements. In contrast, only 3 per cent 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.
The complimentary Preqin Special Report: Private Equity Co-Investment Outlook also covers GP and LP co-investment activity, industry perceptions of co-investments and a look at typical co-investment rights offered to LPs. You can access the full report here.