Is Co-investment a Drag on Commingled Funds?

Findings from a Palico survey of GPs and LPs show a significant number think co-investment hampers the speed of investments from commingled funds

While co-investing has become increasingly popular, a sizable number of GPs and LPs believe the practice is causing a slow down in investments from traditional, commingled funds. That was among the more interesting findings of the second-annual Palico PE Compass report, which surveys GPs and LPs on topics such as fundraising and co-investments.

Palico polled 106 LPs and 179 GPs from all regions of the world—the majority from the U.S., Canada, and Europe—between April 25 and May 27. Forty percent of GPs and 30 percent of LPs believe that increased co-investments have slowed deployment of capital from “classic” commingled PE funds.

The report offers both a comparison of the LP and GPs views, as well as findings from investors and fund managers on their own. Among those key findings:

• The majority of both LPs (76 percent) and GPs (69 percent) believe LP alliances and mergers improve returns; the ability to negotiate lower costs and better terms in exchange for bigger fund commitments is the most-frequently cited justification.
• There will be a “major increase” in fund restructurings as more PE funds from the 2005-2008 boom period hit their 10-year term. 87 percent of LPs and 79 percent of GPs predict a major increase for vehicles holding unrealized investments.
• Most LPs—55 percent—say they are more likely to commit to a fund that offers co-investment over one that doesn’t.…But 51 percent of GPs say less than one in five LPs who request co-investment rights actually exercise them.
• Despite the increase number of GPs that offer funds with much longer lifespans than the classic 10-year holding period, 76 percent of LPs surveyed say they are not yet interested in investing in such funds.

You can read the full report here.