European pensions that have invested heavily in co-investments will face a rude awakening if public markets hit a downturn, according to the head of alternatives at one of Sweden’s largest pension funds.
“I don’t think we’ve been through a whole cycle yet with co-investments and there are certainly some challenges there,” AP7‘s Per Olofsson told Private Equity International. A macroeconomic downturn will most acutely hit co-investments which many Swedish and European pensions have embarked upon in order to reduce fees, he said.
Around $23 billion was raised in co-investment capital globally in the first half of this year, accounting for around one quarter of all shadow capital, according to data from Triago.
Co-investments often enable GPs to acquire targets outside of their usual bite size and give limited partners a chance to avoid management fees. As demand for such deals increases, so too does the potential for investors to rush into deals that may not be right for them or the GP.
The pressure and tight deadlines in which to decide on co-investments can make deciding on a co-investment opportunity almost impossible, Olofsson said.
“The GP may have been working on the deal for six to 12 months, and you have three weeks to decide if you want to participate or not. It’s very hard to make up your mind unless you have a very strict process and internal resources. You may not even have time to meet with the company, if possible. How can you form your own opinion?”
AP7, which has around €48 billion in assets under management, only makes co-investments through dedicated discretionary co-investment funds that charge fees “much lower than one-and-10” and account for 10 percent of the pension’s portfolio, according to Olofsson.
The percentage of LPs co-investing alongside general partners shot up from 26 percent in summer 2006 to 55 percent in the winter of 2017-18, according to Coller Capital’s 2017 Global Private Equity Barometer.
– Alex Lynn contributed to this report.
Stay tuned for the full Privately Speaking interview with Olofsson next month.