Baby steps

Large pensions in the US have been gaining exposure to co-investments through intermediaries, rather than going directly to the source, as a tentative step towards a bolder co-investment future.

Institutional investors in the US are taking “intermediate” steps toward becoming direct investors in private equity, according to a placement agent.

“Some large plans in the US with in-house capabilities have the potential to do co-investments directly. However, in many instances, the intermediate step is to outsource that segment of their programme through a fund of funds or separate account with a co-investment allocation,” Jim Weidner, a partner with Atlantic-Pacific Capital, tells PEI.

“As a plan sponsor, [a fund of funds or separate account with a co-investment allocation is] a great way to get your board comfortable with gradually moving into co-investments with an eye on eventually bringing the capability in-house,” Weidner says.

One prime example of this sort of outsourcing arrangement is a firm called Fisher Lynch Capital, which has raised two funds exclusively for Oregon and Washington State’s massive public pension plans.

The funds, called Fisher Lynch Capital Co-Investment Partners I and II, target leveraged buyouts and growth equity deals, as well as venture capital, mezzanine and distressed. The firm raised $525 million for the first fund, and $1 billion for Fund II. As of 30 September, 2009, Fund I had a .9 percent multiple and a -5.3 internal rate of return, according to the Oregon Investment Council.

“We can tailor the amount of capital necessary for a specific situation, with an investment range of $10 million to $100 million and the ability to invest in stages if necessary,” the firm says on its web site.

Through its co-investment programme, the firm “seeks to provide its investors with highly selective, top-performing direct private equity portfolio company exposure”.

Larger LPs will continue to look for opportunities to co-invest with managers they like, but there is some suggestion that the market will see more of these types of neatly tailored investment structures.

“This is not a new phenomenon, though it’s becoming a larger trend,” says Marc Friedberg, an investment consultant with Wilshire Associates. “In the past, co-investments were offered more on a one-off basis, but with the growth of funds of funds, they’re offering more products in this area.

“I’d say starting four or five years ago, as opposed to co-investments as a one-off, firms have been offering specifically structured co-investment vehicles with the intent to limit and reduce that J-curve, and potentially also that additional layer of fees,” Friedberg says.