DACH and French LPs grow keen on co-investments

Institutional investors are trying to do whatever they can to reduce gross-to-net spreads or reduce overall private equity fees to boost performance, according to research by Rede Partners.

Limited partners in the DACH region and France grew more bullish towards co-investments in the first half of this year, according to research from European placement agent and advisor Rede Partners.

The firm’s H1 Liquidity Index put investor sentiment towards co-investments in Europe at 70 on a scale where no change in sentiment is equivalent to 50, a more positive sentiment scores above 50 and less positive sentiment below.

DACH investors earned an RLI score of 79 for co-investments, up from 72 in the second half of last year, and French sentiment grew to 69 from 60 previously. UK sentiment plummeted to 68 from 84.

“Over the years, we have seen more and more appetite for co-investments and more and more creativity by institutions, who are trying to move from full fee-paying passive fund investments to co-invest with managers, to even more aggressive Canadian-style direct investing and effectively building full in-house direct investment teams,” Rede co-founder Scott Church told Private Equity International.

“This RLI shows there’s been no pullback in co-investments, which is an indication that there is more and more pressure by the trustees and boards of these institutions to do whatever they can to reduce the gross-to-net spreads or to reduce the overall fees paid into the asset class and to boost performance.”

North American LP sentiment towards co-investment increased marginally to 69 from 67 and Canadian sentiment remained at 90. LPs with a €10 billion to €30 billion private equity allocation were most bullish at 86. Those with an allocation below €1 billion scored 66, the lowest of any investor size.

The $219.2 billion California State Teachers’ Retirement System said in November that increasing the pension’s private equity co-investments over the next three to four years gives the “greatest opportunity for improving performance” and reducing fees.

Building a co-investment team is also one of the top priorities for New York City Public Pension Funds, which manages more than $200 billion across five New York City public retirement systems including the $66 billion New York City Employees’ Retirement System and the $73.7 billion Teachers’ Retirement System of the City of New York.

Elsewhere, sentiment towards secondaries remained muted at 49, a marginal increase from 44 in H2 2018. North American LPs were most bearish at 42, while European investors expect a moderate increase in secondaries activity at 55.

Insurers and endowments had the poorest view of secondaries, scoring just 31 and 30 respectively. Pensions and family offices also expect to reduce their secondaries activity, scoring 48 and 44.

Overall, 90 percent of respondents said they expected to maintain or increase the amount of capital they allocated to private equity in the year ahead. LPs have shown a taste for new managers, which recorded sentiment of 66 versus 58 for existing managers.

The report also found that European LPs are more enthusiastic about new managers than their North American counterparts, with the former scoring 63 points, compared with 50 for the latter.

– Carmela Mendoza contributed to this report.