Demand for private equity co-investments has pushed down returns from the strategy, according to data from CEPRES.
Close to $75 billion of co-investment capital was invested between 1999 and 2016, according to research by the private markets analytics platform, which used data from its clients.
The report – Evaluating Co-investments in a Portfolio Context – found that co-investment activity has had significant year-on-year increases over the the 18-year period. Just 33 co-investments were recorded in 1999, compared with 677 in 2016.
Returns have trended down overall, the report found. Median co-investment returns, based on the co-investment cashflow on CEPRES’ platform, delivered a gross internal rate of return high of 56.2 percent in 2003 and experienced dips over the years. Returns more than halved to 22 percent gross IRR in 2009, slid to 14 percent in 2015 and dropped to 1.1 percent in 2016, according to CEPRES PE.Analyzer.
Co-investment is “not a silver bullet” and LPs should take a considered approach when doing such transactions, the report noted.
“Investors want to expand their use of co-investments and so it is expected numbers will continue to rise. But performance is expected to be cyclical and co-investments ability to outperform versus fund investments is largely driven by selection capability and [the] ability to negotiate fee relief,” Christopher Godfrey, president and senior partner of CEPRES’ US office told Private Equity International.
The report analysed co-investment deals made by CEPRES clients in the 18 years to 2016 and compared these against all other fund-backed deals across 6,961 funds and 69,952 deals. Transactions later than 2016 were not included as these were too young to provide any substantial trend, according to a CEPRES spokeswoman.