Co-investments: ‘There’s no one right model for LPs’

Firms including BlackRock, Allianz and Coller Capital revealed their approaches to the strategy at a conference in London.

PE Insights, LP focus
L-R: Jaroslava Korpanec, Allianz Capital Partners; Ana Maria Harrison, Adams Street Partners; Raja Hussain, BlackRock; David Smith, Capital Dynamics; Matthieu Ducharme, Northleaf Capital Partners; David Jolly, Coller Capital (Source: Private Equity Insights)

LPs who want to capture the best co-investment opportunities are approaching the strategy in ways that highlight their most attractive qualities, a conference has heard.

Jaroslava Kopanec, managing director of Allianz Capital Partners – the asset management arm of the German insurance group – said at the PE Insights conference in London on Thursday that moving into co-investments helped the firm expand its geography and exposure to different strategies and sectors.

“We are a team in Munich, but we don’t have a large presence in Asia and Latin America and those are markets where we plan to beef up,” Kopanec said. “Just investing in funds is not something that’s attractive to us. It’s really through co-investments that we learn about the market, about the key players, how assets are priced.”

For Toronto-based investment firm Northleaf Capital Partners, co-investments are done through its primary programme.

“It makes sense for us to have one contact point and it’s a way to refine our portfolio construction,” said Matthieu Ducharme, a managing director at the firm. “Most GPs think we do co-investments because we just want lower fees and carry, but that’s not the case. It’s very much a tool to accelerate deployment, reduce the J-curve and refine the return profile – that’s the way we see co-investments in our business.”

Northleaf tends to invest in between 5 percent and 10 percent of all co-investments it sees, Ducharme added.

Switzerland-headquartered Capital Dynamics said it has a deal-first-before-GP approach.

“The fundamental thing is that we are looking for the underlying business first. We meet the management team and ask ourselves whether we want to back them,” said David Smith, managing director and the firm’s head of co-investment.

After portfolio company management selection, the firm then looks at the effectiveness and competence of the GP via its integrated database, Smith added.

Raja Hussain, a director at BlackRock, noted the firm’s approach is largely relationship-based.

“When we look at co-investments, one of the first questions we ask ourselves is: is this the right GP for this deal?” Hussain said. “It’s a relationship-based approach and the point of contact with the client needs to be consistent.”

BlackRock is able to look at the underlying opportunity and leverage its resources such as in-house analytics, as well as relationships in the alternatives market and with listed companies, Hussain added.

“As a result of that we are being brought in early in transactions, we co-underwrite and then it’s idea and deal generation, where if an opportunity comes to us through the broader platform we can be selective about the GP,” he said.

For secondaries firm Coller Capital, co-investing has evolved through access to dealflow, according to partner David Jolly.

“Pure co-investment will not be a really meaningful portion of our fund,” Jolly said. “If there was period of time where we are not seeing enough quality co-investments, we are not compelled to deploy a co-investment product.”

In Coller’s Global Private Equity Barometer, Summer 2019, 76 percent of LPs surveyed said they benefited from co-investment opportunities offered by their portfolios. In addition, 65 percent said they derived additional value from market insights or knowledge transfer from GPs.

Nearly two-thirds of LPs planned to invest in co-investment opportunities this year, according to PEI LP Perspectives Survey 2019.