Content Includes: Importance of Co- Investments The majority of GPs believe offering co-investments is important for fundraising success. Preqin Special Report: Private Equity Co-Investment November 2015 Offering Co-Investments More than two-thirds of GPs surveyed currently offer coinvestment rights. Current Activity Over half of LPs that currently have open coinvestment 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 coinvestments. Future Plans Both GPs and LPs expect co-investment activity to remain strong. alternative assets. intelligent data.
Preqin Special Report: Private Equity Co-Investment Download the data pack: Foreword 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 significant 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 find 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 find 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, 3 of GP respondents also stated that 81-10 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 coinvesting reported that their co-investments have delivered superior returns to their private equity fund commitments, with 4 stating that their past co-investments have outperformed fund investments by more than, in contrast to just 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 benefits such as co-investment rights in order to improve their chance of a successful fundraise. To find 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 info@preqin.com or at our New York, London, Singapore, San Francisco or Hong Kong offices. 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 All rights reserved. The entire contents of Preqin Special Report: Co-Investment, 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, 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 transaction, or as advice of any nature whatsoever. If the reader seeks advice rather than information then he should seek an independent financial 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, November 2015. While reasonable efforts have been made to obtain information from sources that are believed to be accurate, and to confirm 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, 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, November 2015 or for any expense or other loss alleged to have arisen in any way with a reader s use of this publication. 2 2015 Preqin Ltd. / www.preqin.com
Download the data pack: Preqin Special Report: Private Equity Co-Investment Breakdown of Survey Respondents Total Number of GPs Surveyed: 320 Total Number of LPs Surveyed: 222 Breakdown of GP Respondents by Location Breakdown of LP Respondents by Location North America 47% Europe 29% Asia 9% North America 48% Europe 3 Asia 8% Rest of World 1 Rest of World 9% Source: Preqin Source: Preqin GP Respondents by Primary Investment Type Breakdown of LP Respondents by Type 8% 4% 4% 24% Real Estate Buyout Venture Capital Growth Infrastructure 4% 4% 9% 17% 1 Fund of Funds Manager Asset Manager Family Office Public Pension Fund Private Sector Pension Fund Insurance Company 1 1 19% Mezzanine Distressed Private Equity Natural Resources 7% 8% 1 1 Endowment Plan Foundation Investment Company Bank Source: Preqin Source: Preqin GP Respondents by Size of Most Recent Fund LP Respondents by Assets under Management 22% 1% Less than $500mn 24% 18% Less than $250mn $250-499mn 72% $500mn-1.5bn $1.6-4.5bn More than $4.5bn 12% 27% 11% 7% $500-999mn $1-4.9bn $5-9.9bn More than $10bn Source: Preqin Source: Preqin 2015 Preqin Ltd. / www.preqin.com 3
Preqin Special Report: Private Equity Co-Investment Download the data pack: 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. Fig. 1: Importance of Being Open to Offering Co-Investment Rights for a Successful Fundraise 17% 9% Vitally Important 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. 39% 3 Very Important Somewhat Important Not Important 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 (7) and improving the chance of a successful fundraise (5), 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 (2) 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. Private Equity Online Private Equity Online is Preqin s flagship 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 Fig. 2: Perceived Benefits of Offering LPs Co-Investment Rights Fig. 3: Perceived Disadvantages of Offering LPs Co-Investment Rights 9 8 7 6 5 3 1 84% Build a Stronger Relationship with LPs 7 Gain Access to Additional Capital for Deals 5 Improve the Chance of a Successful Fundraise 29% 27% Benefits to the Portfolio Company Opportunity to Better Manage Risk 1 Opportunity to Enhance Product Differentiation 1% 8 7 6 5 3 1 69% Slows Deals Process 44% 44% Differences in the Terms or Rights of Co-Investors Additional Costs/Resource 2 Negative Impact on Relationships with LPs 4 2015 Preqin Ltd. / www.preqin.com
Download the data pack: Preqin Special Report: Private Equity Co-Investment GP Co-Investment Activity GP Offerings More than two-thirds (69%) of the GPs surveyed offer coinvestment 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 1 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 colead (1), 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 Fig. 5: Types of Co-Investment Opportunities GPs Offer LPs Fig. 4: Proportion of GPs Offering Co-Investment Rights to Their LPs 18% 1 69% Offer Co-Investment Rights Considering Offering Co-Investment Rights Previously Offered Co- Investment Rights but Do Not Anymore Do Not Offer Co- Investment Rights increasing proportion of their LPs co-investment opportunities; between 2014 and H1 2015, the proportion of fund managers offering 0-3 of their LPs co-investment opportunities has dropped, and in turn, the proportion offering these opportunities to more than 8 of their investors has risen considerably. In 2014, 11% of GPs were offering more than four out of five LPs co-investments; this has risen to 2 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 () 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 5 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 Fig. 6: Typical Stage in Investment Cycle at Which GPs Offer Co-Investment Rights to LPs 8 7 6 5 3 1 74% Syndicated Co-Investment 27% Co-Underwrite 1 Co-Sponsor 1 Co-Lead 2% 7 6 5 3 1 58% During Fundraising Process 4 During Bid for Deal 2 Post-Deal Completion 1 Pre-Marketing of Fund 7% At Final Close of Fund 2015 Preqin Ltd. / www.preqin.com 5
Preqin Special Report: Private Equity Co-Investment Download the data pack: equity deals rose from 11% in 2014 to 2 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. 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 in 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 Fig. 7: Proportion of LPs Offered Co-Investment Opportunities by GPs, 2014 vs. H1 2015 Fig. 8: Proportion of LPs Offered Co-Investment Opportunities that Actually Ended Up Co-Investing with the GP, 2014 vs. H1 2015 Proportion of LPs Offered Co-Investment 81-10 61-8 41-6 31-21-3 11-1-1 7% 8% 11% 14% 14% 2 21% 2 2 2014 H1 2015 Proportion of LPs Offered Co-Investment 81-10 61-8 41-6 31-21-3 11-1-1 4% 4% 4% 1% 1% 7% 1 1 21% 18% 29% 3 2014 H1 2015 1 1 2 3 1 3 5 Fig. 9: Proportion of Equity from LP Co-Investors in Deals, 2014 vs. H1 2015 Fig. 10: Size of Deals Completed that Included LP Co- Investors, 2014 vs. H1 2015 Proportion of Equity 5 or More 40-49% 30-39% 20-29% 11-19% 1-1 7% 11% 11% 12% 1 2 22% 22% 24% 24% 2 1 3 2014 H1 2015 Average Proportion of Deals Including LP Co-Investors 9 8 7 6 5 3 1 81% 7 7 69% Less than $50mn $50-99mn 6 8 $100-499mn 67% 61% $500-999mn 57% $1bn or More 2014 H1 2015 Deal Size Data Source: Preqin s Fund Manager Profiles has extensive information for over 9,300 active private equity firms worldwide. Detailed profiles 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 6 2015 Preqin Ltd. / www.preqin.com
Download the data pack: Preqin Special Report: Private Equity Co-Investment LP Relationship Preqin s survey results highlighted the differing experiences GPs have when co-investing with LPs. For example, the largest proportion (4) of fund managers stated that the additional capital co-invested by their LPs typically equates to 1- of the LP s original fund commitment (Fig. 11). However, for 9% of GP respondents, the additional capital equated to 10 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 (5) 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 significance, highlighted by two in five GPs, while 3 of fund managers have Fig. 11: GPs Observations of Additional Capital Typically Co-Invested Alongside Fund s by Their LPs requirements relating to LP reliability and 3 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 finding 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 of LPs in their most recent fund requested co-investment rights (Fig. 13). On the other hand, 11% of GPs surveyed had over 8 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 (3) stated that 81-10 of LPs in their most recent fund had co-investment rights included in their LPA, as shown in Fig. 14. Fig. 12: Requirements for Investors to Qualify for Co-Investment Rights 4% 1 9% 4 1- of Fund 21- of Fund 41-6 of Fund 61-8 of Fund 6 5 3 1 5 3 3 29% 2 81-10 of Fund More than 10 of Fund Speed at Which LP Can Decide on Co-Investment Size of Fund LP Reliability Previous Expression of Interest in Co-Investments LP Bite-Size Requirements No Requirements, Offered to All LPs Fig. 13: Proportion of LPs in Most Recent Fund to Request Co-Investment Rights Fig. 14: Proportion of LPs in Most Recent Fund to Have Co- Investment Rights Included in LPAs 11% 41% 0-21- 41-6 61-8 3 1% 21% 14% 1-1 11-21-3 31-41-6 24% More than 8 9% 2% 8% 1 61-8 81-10 2015 Preqin Ltd. / www.preqin.com 7
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Download the data pack: Preqin Special Report: Private Equity Co-Investment 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 coinvest, 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 (2) 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 coinvestments 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 coinvestments per position is $2-10mn. Many LPs seem to coinvest 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 (6) of LPs that are co-investing alongside their fund commitments only invest between 1% and of their initial stake in the fund via co-investment positions (Fig. 17). Thirty percent of LPs typically commit between 21% and 10 to coinvestment 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 Fig. 15: Breakdown of LPs by Current Co-Investment Activity 24% 22% 2 24% Actively Co-Investing Opportunistically Co- Investing Have Not Co-Invested Previously, Will Consider in Future Have Co-Invested Previously, But No Future Plans Never Co-Invested, No Plans to Co-Invest in Future 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 1 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 Fig. 16: Current Number of Open Co-Investment Positions Held by LPs Fig. 17: Additional Capital Typically Co-Invested Alongside Fund s by LPs 1 21% 1-2 3-5 6-10 1% 7% 1- of Fund 21- of Fund 41-6 of Fund 12% 22% 2 11-20 21-50 More than 50 21% 6 61-8 of Fund 81-10 of Fund More than 10 of Fund 2015 Preqin Ltd. / www.preqin.com 9
Preqin Special Report: Private Equity Co-Investment Download the data pack: 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 coinvesting 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 coinvest, 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 coinvest as it would reduce their level of diversifi cation, leaving them overexposed to certain deals by committing additional Fig. 18: LP Approaches to Co-Investments Proportion of LP Respondents 7 6 5 3 1 59% Selective Follower 27% Passive Follower Co-Underwrite capital to the same portfolio company. A very small 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. 1 Co-Sponsor 1 Co-Lead 2% Fig. 19: LPs Perceived Benefits of Co-Investing Fig. 20: LPs Reasons for Not Co-Investing Proportion of LP Respondents 8 7 6 5 3 1 67% Better Returns 61% Lower Fees Strengthen GP Relationships 34% More Control over Investments 31% Gain Access to Specifc Portfolio Companies 2 Gain Knowledge of Industry Sector Proportion of LP Respondents Not Co-Investing 3 3 2 1 1 3 Lack of Resources 19% 19% Reduces Diversification Not Interested 8% Not Part of Investment Plan Legal Restrictions Returns Too Low Allocation Too Small 8% 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 profiled 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. For more information, please visit: www.preqin.com/ii 10 2015 Preqin Ltd. / www.preqin.com
Download the data pack: Preqin Special Report: Co-Investments Performance of Co-Investments 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. 21, of those LPs surveyed, 3 expect co-investments to outperform private equity fund returns by more than. 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. Fig. 21: LPs Level of Desired Outperformance of Co-Investment 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 4 witnessing returns that are over greater than those in the standard private equity fund arrangements. In contrast, only 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 coinvestment structure remains a relatively new, albeit growing, way of committing to the private equity asset class. Fig. 22: Performance of Past Co-Investments Compared to Private Equity Fund Returns 3 3 Outperforming PE Fund Returns by up to 2. Outperforming PE Fund Returns by 2. to Proportion of LP Respondents 5 4 3 3 2 1 1 17% 14% 4 34% Outperforming PE Fund Returns by 5.1% and over - or More -2. to - Up to -2. Performed the Same as PE Funds Up to +2. +2. to + +5.1% or More Underperformed PE Fund Returns Outperformed PE Fund Returns Source new investors for funds Identify new investment opportunities Conduct competitor and market analysis Find potential deal opportunities Develop new business Register for demo access to find out how Preqin s Private Equity Online can help your business: www.preqin.com/privateequity
Preqin Special Report: Private Equity Co-Investment Download the data pack: 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 : 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 (3) of respondents indicated that they would take an opportunistic Fig. 23: LP Preferences for Co-Investments by Fund Type 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 3 of LPs surveyed are looking to target Asia for co-investment opportunities, lower than Rest of World (). Fig. 24: LP Preferences for Co-Investments by Region Small to Mid-Market Buyout Growth 52% 77% North America 72% Venture Capital 34% Special Situations Large to Mega Buyout 32% 29% Europe 62% Mezzanine Distressed Debt 2 Asia 3 Turnaround 19% Cleantech 1 Rest of World 6 8 10 Proportion of LP Respondents 6 8 Proportion of LP Respondents Fig. 25: Notable Institutional Investors that Co-Invest Saudi Economic & Development Company Investment Company Location: 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 of its total assets (2 of its private equity portfolio) to direct and co-investment opportunities. It does not take a stake in a company larger than 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 Agency Location: Netherlands Total Assets: 7.1bn Target PE Allocation: 2 of Total Assets Current PE Allocation: 2 of Total Assets Netherlands Development Finance Company (FMO) made its fi rst co-investment alongside a GP in 1998 and dedicates approximately 3 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 Fund Location: US Total Assets: $26.2bn Target PE Allocation: 1 of Total Assets Current PE Allocation: 1 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 coinvesting 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 Fund Location: US Total Assets: $286.4bn Target PE Allocation: 10.27% of Total Assets Current PE Allocation: 1 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. 12 2015 Preqin Ltd. / www.preqin.com
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Preqin Special Report: Private Equity Co-Investment Download the data pack: 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 (5) 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 coinvestments 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 3 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. Fig. 26: Proportion of LPs Insisting on Co-Investment Rights when Committing to a New Fund 47% 17% 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. 29% Always Insist Sometimes Insist Rarely Insist Never Insist Fig. 27: LPs Co-Investment Requirements Fig. 28: Discounts Offered to Co-Investing LPs Compared to Usual LP Fund Proportion of LP Respondents 6 5 3 1 5 No Special Requirements 3 Special Fees 19% Board Representation 1 Seat on the LP Committee 9% 6 5 3 1 49% No Fee 3 Reduced Fee Management Fees 1 48% 27% Same Fee No Carry Reduced Carry Carried Interest 2 Same Carry 14 2015 Preqin Ltd. / www.preqin.com
Download the data pack: Preqin Special Report: Private Equity Co-Investment 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 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 (2) 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 coinvestment 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 coinvestment opportunities in the next year. Fig. 29: GPs Future Co-Investment Plans 2% 19% 2 2 44% 34% Fig. 30: LPs Future Co-Investment Plans 49% Offer More Opportunities Offer Same Number of Opportunities Offer Fewer Opportunities Uncertain Increase Co- Investment Activity Maintain Level of Co- Investment Activity Decrease Co- Investment Activity Uncertain on Future Co-Investment Plans Research Center Premium All of the free research reports, newsletters, statistics and tools Preqin offers can be found in one place: Preqin s Research Center Premium. This free service provides access to analysis of the latest trends in alternative assets and can be used to: Explore our complete archive of research reports and newsletters looking at key trends across private equity, hedge funds, real estate, infrastructure and private debt. Access charts and league tables, powered by Preqin s award-winning online services, to find out the latest stats on fundraising, deals, dry powder, industry AUM, investors and more. See what the typical returns have been for private equity funds of different vintages, geographic foci and strategies. Download the data from all the charts and league tables included in our research reports and slide decks presented by Preqin at recent conferences. For more information, or to register for free please visit: www.preqin.com/rcp 2015 Preqin Ltd. / www.preqin.com 15
Preqin Special Report: Private Equity Co-Investment November 2015 Preqin: Global Data and Intelligence If you want any further information, or would like a demo of our products, please contact us: With global coverage and detailed information on all aspects of the private equity asset class, Preqin s industry-leading Private Equity Online services keep you up-to-date on all the latest developments in the private equity universe. Source new investors for funds and co-investments Find the most relevant investors, with access to detailed profi les for over 6,000 institutional investors actively investing in private equity, including future fund searches and mandates, direct contact information and sample investments. Identify potential investment opportunities View in-depth profi les for over 2,400 unlisted private equity funds currently in market, including information on investment strategy, geographic focus, key fundraising data, service providers used and sample investors. Find active fund managers in private equity Search for fi rms actively targeting private equity investments. View information on key contacts, fi rm fundraising and performance history, and applied strategies of the fi rm when investing in portfolio companies and assets. Analyze the latest private equity fundraising activity See which fi rms are currently on the road raising a private equity fund and which will be coming to market soon. Analyze fundraising over time by fund strategy and location. See the latest buyout and venture capital deals and exits View details of more than 133,400 buyout and venture capital deals, including deal value, buyers, sellers, debt fi nancing providers, fi nancial and legal advisors, exit details and more. Identify forthcoming exits and expected IPOs. Benchmark performance Identify which fund managers have the best track records, with performance benchmarks for private equity funds and performance details for over 7,700 individual named funds. Examine fund terms See the typical terms offered by funds of particular types, strategies and geographical foci, and assess the implications of making changes to different fees. Find out how Preqin s infrastructure products and services can help you: www.preqin.com/privateequity New York: One Grand Central Place 60 E 42nd Street Suite 630, New York NY 10165 Tel: +1 212 350 0100 Fax: +1 440 445 9595 London: 3rd Floor Vintners Place 68 Upper Thames Street London EC4V 3BJ Tel: +44 (0)20 3207 0200 Fax: +44 (0)87 0330 5892 Singapore: One Finlayson Green, #11-02 Singapore 049246 Tel: +65 6305 2200 Fax: +65 6491 5365 San Francisco: One Embarcadero Center Suite 2850 San Francisco CA 94111 Tel: +1 415 316 0580 Fax: +1 440 445 9595 Hong Kong: Level 9, Central Building 1-3 Pedder Street Central, Hong Kong Tel: +852 3958 2819 Fax: +852 3975 2800 Email: info@preqin.com Web: www.preqin.com 2015 Preqin Ltd. / www.preqin.com