Here’s Why Private Equity Firms Love Co-Investments

4 Reasons to Love Co-Investments

  1. Co-Investment’s Strong Allure

Before we dive into why LPs find co-investments so appealing, let’s review how they differ from standard fund structures. Put simply, in a co-investment, an LP—along with other investors—makes a direct investment into a portfolio company. Financial investors also usually include a general partner (GP) whose traditional funds the LP already backs. This type of deal bypasses the well-defined agreements of typical private equity partnerships between GPs and LPs.

With very different terms than those in a standard partnership agreement, co-investments are technically a minority ownership stake for co-investors, many of whom are already existing LPs. 

Depending on the equity splits between a lead sponsor and the co-investors, the identity of the co-investors, and factors such as deal origination, sector expertise, and the jurisdiction of the co-investors, co-investments are often unique, with no one-size-fits-all arrangements.

  1. Co-Investments Have Investor Appeal

In the age of digital disruption, investors are increasingly asking for customized arrangements like separate accounts and co-investments. So, it makes sense that LPs are eager to find opportunities like these. LPs can attract today’s investors and stand out in the marketplace.

“The demand has never been there at this level,” explains Altvia SVP, Industry Solutions & Strategy, Jeff Williams, in an interview with Tom Stabile of FundFire for the article “Blackstone, TPG Snag Private Equity Asset Crown.” He continues: “There is an increased desire for the asset class, and [limited partners] are trying to find creative ways to put [their capital] to work. And there is an overwhelming sense that we’re in the early part of the game.”

  1. Co-Investments Have Term Appeal

Another big draw for LPs? 

The potential for higher returns with lower fees—something that naturally, investors are also looking for. ValueWalk reported that 80% of LPs reported better performance from co-investments than from traditional fund structures. In the same ValueWalk survey, almost half (49%) of GPs charge no management fee on co-investments, and 48% charge no carried interest.

In addition, co-investments can help lead sponsor co-investors plug holes created by tight debt markets, reduce risk exposure, and/or bring additional industry or regional expertise (or simply a brand name) to an investment. There are also opportunities to find diversification, achieve better net investment returns, and accelerate capital deployment

But the benefits don’t end there. Disagreements between GPs and LPs over a deal structure, asset buckets, or costs have ruined many a great investment. 

LPs prefer the co-investment model because it offers them an opportunity to:

  • Understand how a GP operates, including how they perform due diligence
  • Test-drive or deepen potential relationships with GPs, investors, and colleagues
  • Piggy-back on the insight and expertise of the lead investor

  1. Co-Investments Have Career Appeal

Private equity firms are finding co-investments ideal for keeping LPs on staff, while also providing opportunities for greater differentiation in the marketplace. To investors, a trusted CFO with a capable team that exceeds expectations and upholds the firm’s reputation speaks volumes during due diligence.

In fact, 48% of CFOs identified talent attrition as a top risk in the EY 2018 Global Private Equity CFO survey. CFOs understand that engaged LPs remain loyal and perform better, making co-investment deals a win-win for firms, too.

What’s more, strategic co-investments offer more than a way to attract and retain top talent, they’re also an opportunity to engage with your network in a new way and solidify your firm’s reputation in an increasingly competitive environment. 

What’s not to love?

A traditional crm was built for general ‘customer’ scenarios

Software platforms have made the world a better place by making work a better place. Indeed the world is better off when people enjoy their jobs even marginally more, and workplace applications on big CRM platforms like have done that and much more.

But the potential that platforms like these offer presents diminishing returns: once the platform provider has engineered too many industry specific components into its platform, its usefulness for other industries begins to be threatened, and with that so do the usefulness of the component tools built into the platform.

So it is with the CRM category that has defined: it is generic enough to work for many industries, and yet still offers the potential for others to round off the edges and nail more vertically-oriented and extremely tailored software solutions.

Private capital markets are actually a great demonstration of this dynamic. Where generic CRM platforms simplify — appropriately so — to assume there’s a business, a customer, a sale, and service of that customer, there are a few industry-specific pieces that are missing.

Take for example, that investors become customers by investing through legal entities the GP raises. It’s a subtle but important nuance that just doesn’t make sense at a platform-as-a-service level (because it’s overly complicated for a simple one-time sale that many industries require), but which can easily be added without 10 years or software engineering. Once provided, the rest of the platform’s components become tremendously powerful again and you’re set to take over the world.

As a traditional CRM in our pillars methodology, these nuances must be present to properly account for investors in these legal entities, potential target companies and which are owned by these entities, the context of all interactions with these parties (as well as the appropriate overlap, ie co-investments), and how you’re arriving at finding these opportunities on both sides of the equation, such that you’re able to piece together what’s effective and what’s not. Not just because we say so, but because these are the very relationships and data that are key to the motivation behind a CRM in any industry.

It’s critical, too, that the valuable publicly-available information that helps to enrich CRM systems and save users painful steps of entering it themselves is fully-integrated at the platform level.

Again, look no further than the 3,000+ pre-built integrations that — the creator of the CRM platform concept — has at a platform level to do so, and which only exists by way of holding just short of overly-specifying certain industry workflows that would present challenges to properly integrate.

Stakeholder reporting and communication (investor relations) draws on a range of datasets

The traditional “customer service” model of CRM systems once again makes overly-simplified assumptions about the customer relationship when applied to private capital markets.

In fifteen years I personally have yet to hear the terms “warranty” or “service call” in this market because it’s just not the same. But make no mistake, as uncomfortable as it may be to say aloud, customer service is more important now than ever and it’s constantly happening; the industry is, after all, considered to be a financial “service”.

As it turns out, that service is primarily information-based — it’s driven by data and takes the form of reports and analysis that drive decisions, and then end up again in investor-facing reports and analysis.

The foundational elements of a private capital markets CRM must be built such that they accommodate this data (like we discussed above), but so too that it can accommodate additional supporting data that investors (customers!) need in the context of service.

Oftentimes this supporting data — financial metrics and time-based values, for example — is believed not to meet the traditional definition of CRM and the natural thought is “well, better do this in Excel!”.

While I happen to believe Excel is still the greatest software application ever built, its introduction to this value chain we’ve discussed herein actually creates the problem many firms suffer from: key data needed to provide customer service (again: effectively the entirety of a firm’s reports and analysis) is now in disparate systems and detached.

Both of those dynamics are important and distinct: not only is this supplemental data disparate, but when brought together there is no logical association that can be made between the two data sets.

Allow me, then, to make the point very simply: not only can this financial and time-based value data (you may be thinking about is as “portfolio monitoring” or “accounting”) be a part of a CRM, it is arguably the most important part of a CRM because it’s at the core of what providing service to the customer entails — information that comes out of data!

Firms need a digital method to engage stakeholders (ie investor portals)

Investor portals are not new; in fact, for many of us — including myself — they conjure up horrifying nightmares in which we’re aimlessly guessing at folders to find the newest document we need.

So in lies the opportunity: not only have the portals we’ve come to hate not simplified the process of acquiring information, they’ve failed to create an entirely new experience that is “customer service” driven.

To be fair, this is not a B2C market where you’d be long out of business for not having focused on customer service and thus the customer’s technology-driven experience. But don’t expect to be around too much longer if you aren’t thinking about this shift.

Today’s institutional investors increasingly expect this same consumer-like experience, and a massive opportunity is being missed by not providing it. It’s not about providing them the experience they desire; it’s more about the ability to measure engagement that is had in return.

Put simply: what’s keeping the market from providing this experience is the availability of the information that’s required to create the service that provides the experience.

If you’ve hung in this long, you know that by focusing on your CRM, you have the data that’s required to manage the customer relationship and the technology-driven experience through which that information is shared to create a differentiated and opportunistic customer experience.

investor experience