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Lexington’s $3.2bn raise shows co-investment fundraising bouncing back

The firm has held the final close on its latest co-investment fund in a year where co-investment appetite and deal opportunities are expected to rise.

Lexington Partners has gathered $3.2 billion for its fifth co-investment vehicle – its largest ever fund for the strategy – in what is expected to be a year in which co-investment appetite and deal opportunities pick up.

The New York-based secondaries giant, which began raising capital in August 2019 for Lexington Co-Investment Partners V, surpassed its hard-cap of $3 billion, according to a statement seen by Private Equity International. It had an initial target of $2.5 billion for the vehicle, as previously reported.

“We currently see a high level of take-privates and execution of opportunistic follow-on M&A for our existing portfolio companies,” James Pitt, a partner at Lexington, told PEI. “We are also evaluating a variety of interesting buyout and corporate carve-out transactions, often with covenant-lite debt structures which can help reduce equity risk.”

Pitt added that the firm continues to see lead investors managing their fund exposure by ensuring that capital for transactions is fully spoken for in advance through both formal and informal co-underwriting processes.

Appetite for co-investments is picking up, following a lower take-up last year. Private equity firms raised about $13 billion for co-investment vehicles in 2020, half the amount raised in 2019, according to PEI’s Fundraising Report 2020.

CIP V had a greater than 90 percent re-up rate in terms of the number of LPs, Pitt told PEI. He noted that returning LPs on average committed 25 percent more capital to CIP V than had been the case with its predecessor fund, CIP IV. New LPs contributed 7 percent of CIP V commitments.

The fund received $345 million from the Maryland State Retirement and Pension System, $300 million from the Minnesota State Board of Investment and $200 million from the Florida Retirement System Trust Fund, according to PEI data. Thirteen institutional investors from the US, Europe, Latin America and Australia, with an average commitment size each of $235 million, backed the fund, according to the statement.

Lexington’s GP commitment is $100 million or 3.2 percent of the fund, according to Pitt.

CIP V is about 33 percent larger than its 2016-vintage $2.4 billion predecessor.

Similar to prior funds, capital raised from CIP V will invest alongside GPs in US and European companies. It may also co-invest opportunistically in companies in Asia and Latin America, according to the statement. Ticket sizes will be in the range of $25 million-$100 million, with the ability to drop below $25 million for interesting smaller deals, according to Pitt. He added that the fund is 20 percent committed.

Andrew Beaton, senior managing director on the co-investment team at Capital Dynamics, told PEI in December that investors had quickly resumed their investment programmes following a pause around the middle of last year, when they had to evaluate the impact of the pandemic on their portfolios.

PEI’s LP Perspectives 2021 Study shows that 71 percent of LPs intend to deploy capital in deals alongside managers over the next 12 months.

Among US pensions that have recently been active in co-investments is the California State Teachers’ Retirement System. The pension committed more to private equity co-investments than traditional private equity funds in the second half of 2020, as reported by affiliate title Buyouts.

The California Public Employees’ Retirement System shifted capital commitments to private equity co-investments and separately managed accounts in the last quarter of 2020. The Pennsylvania Public School Employees’ Retirement System is increasing its allocation to private co-investments by another $500 million this year to reach $1.5 billon.