Co-investments rare, problematic

Panelists at the PEI Asia Forum agreed that a co-investment model can be off-putting for LPs.

Private equity funds offering co-investments to LPs could be less appealing to other investors if they appear to have too many assets under management that aren’t investments from the fund itself, according to Soichi Sam Takata, head of private equity at Tokio Marine Asset Management.

Speaking on a panel at the PEI Asia Forum 2014 in Hong Kong this week, Takata, who works on the LP side at Tokio Marine, explained, “We do talk about how much money is actually managed and how big a piece of that [is under separate accounts] to make sure that they are focusing on the main fund not [just] on separate accounts.”

He went on to say that as more LPs have co-investments as a requirement to invest in funds, smaller funds that don’t do large enough deals to provide this could suffer when it comes to fundraising.

“My concern is that because some LPs require co-investments in order to invest in a fund, they will have a selection process that is very different from just investing in a GP that is just good,” he explained.

“Some GPs are too small to offer co-investments because of their team resources or their deal size is too small and so the smaller funds get the short end of the stick and may get less money at the end of the day even if their performance is good. That is a big concern.”

Wen Tan, partner at FLAG Squadron Asia, added that co-investments can be problematic when it comes to the relationship between GPs and LPs if an investor in a fund is competing with the respective GP for a deal.

“If the trend continues where there is an increasing amount of direct investment by LPs, there is a question that many in the GP community will have to start thinking about in such cases [like] what if one of your large investors is also competing with you on transactions.”

However, while they can create issues, co-investments continue to be a rare phenomenon in Asia and globally, panelists agreed.

Takata said that there are just seven LPs globally doing significant amounts of co-investing, and they are all very large institutions. According to data he cited, the seven have an average of $94 billion in assets under management, around a 15 percent allocation to private equity and began investing around 1992.

The same goes for special accounts. “The reality is that for 95 percent of LPs in the market, special accounts are not really a viable option,” Tan explained.

Weichou Su, partner at StepStone Group, added, “[There are] a very small, tiny, amount of people that do [separate accounts] on the GPs side.”