Co-investment is a ‘mixed bag’ for LPs, says Coller US head

Investors with small in-house staff are having to ‘blindly follow’ their managers into co-investments, according to Frank Morgan, president of the firm’s US business.

The trend for limited partners to seek more co-investment opportunities may not provide them with the returns they seek, said Frank Morgan, president of secondaries firm Coller Capital in the US.

Morgan, who was speaking at the Emerging Market Private Equity Association’s Global Private Equity Conference in Washington on Tuesday, questioned the viability of co-investment programmes.

“What perplexes me a little bit is the conflicting academic surveys,” he said. “Some say you do better doing co-investment. Others say the reverse.”

Morgan explained that limited partners initially began making co-investments in order to deploy more capital. More recently, however, the motivation has shifted to increasing returns by avoiding the management fees and carried interest associated with blind-pool fund investing. Management fees on co-investments are, on average, half of those paid on a regular private equity fund commitment, according to research from alternative assets consultancy MJ Hudson.

The other issue surrounding co-investments for LPs, said Morgan, is that most don’t have the capabilities to conduct the necessary due diligence on co-investments due to small investment staff.

“In a small pension plan with a couple of people looking after alternatives, you have to blindly follow the manager,” he said, adding that such LPs may not know whether their managers are presenting them with all the relevant deals or are cherry-picking co-investments.

“A lot of people don’t feel that they have the capability, even though they’d like to do it, because they think they’ll get a better deal by saving the fees and the carry,” Morgan said. “It’s kind of a mixed bag at the moment.”

Morgan also noted that Coller, which is based in London and is currently investing a $7 billion fund it closed in December 2015, has had some success investing in emerging markets, in particular India and Vietnam, but had experienced challenges in othes.

“We’ve had some real currency issues in Nigeria,” he said. “The other problem we’ve had in China has been on governance. We found accounting irregularities, some outright fraud. Some local partners that didn’t quite play along the rules. We want some higher returns to compensate for higher issues in there.”