Around 80% of limited partners have seen their co-investments outperforming private equity funds, with 46% seeing their co-investments outperform by a margin of over 5%, according to a new survey conducted by industry research firm Preqin.
This level of out-performance has drawn limited partners to more co-investment deals. Around 63% of investors surveyed have allocated additional co-investment capital equating to around 1% to 20% of their original commingled fund commitment.
On the part of general managers, 87% currently offer or are considering to offer co-investment rights to their investors. Around 30% of general partners included co-investment rights in 81% to 100% of limited partnership agreements in their most recent fund.
For fund managers, co-investments are seen as a way to improve relationships with limited partners, gain access to more capital for deals, and improve the chance of a successful fundraising in the future.
"Direct investments, including co-investments, have increasingly become part of private equity discourse. Significant interest arising from limited partners has been matched by increased co-investment opportunities provided by general partners," says Christopher Elvin, head of private equity products at Preqin.
Almost half of general partners charge no management fee on co-investments, and 48% charge no carried interest. A quarter of managers maintain the same carried interest rate for co-investments as in their commingled funds, and only 16% charge the same level of management fees.
Limited partners typically commit US$2 million to US$10 million in each co-investment transaction. Seventy-seven percent of investors favor a small to mid-market buyout strategy.
The average proportion of equity in a deal that comes from limited partner co-investors rose from 2014 to the first half of 2015. In 2014, only 18% of managers reported their deals had 40% or more of their equity from co-investments. In the first half this year, that proportion doubled to 36%.
Around 59% of investors take a "selective follower" approach to co-investment, often being offered syndicated opportunities by managers.
"Provided limited partners have sufficient resources available, co-investment opportunities should remain attractive due to their lower fees and greater potential returns," says Elvin.