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LPs eye up co-investments

Some 42% of LPs expect to deploy more capital via co-investments over the next year as investor sentiment shifts away from primary funds.

Investors in private markets funds are expected to increase their co-investments over the next year, according to a report.

Advisory firm and placement agent Rede Partners’ Liquidity Index 2017 found 42 percent of limited partners expect to deploy more capital via the strategy in the next 12 months. The Benelux region saw the largest proportion of LPs planning to increase their exposure to the strategy, at 73 percent.

Only 2 percent of LPs surveyed said they would deploy less into co-investments.

LP sentiment towards co-investments stood at 69 on an RLI scale, where no change in sentiment is equivalent to 50, a more positive sentiment scores above 50 and less positive sentiment below. This compares with 62 for primary funds, the report noted.

Family offices were the most common planned route for co-investment, followed by funds of funds and pensions. In September Japan Post Bank said it would look closely at more co-investment or club deals with GPs due to increased dealflow in the domestic small- to mid-market space.

“It is clear that co-investments are crucial for many LPs when allocating capital to private equity,” Adam Turtle, partner and co-founder at Rede Partners, said.

“On the one hand it can deepen the relationship between them and their investors, as there is no better way to get to know a manager than through investing in a direct deal with them. On the other hand it can lead to disgruntled investors if co-investment demand is not met, and pressure to go ‘off strategy’ in order to cater to it.”

Overall, 90 percent of respondents expect to deploy more or the same amount of capital to primary funds in the next 12 months, continuing a trend that has resulted in record levels of dry powder.

European investors remain on track to deploy more capital to primary funds than their US counterparts, recording scores of 69 and 51 respectively. The finding is in line with industry data, after an August report by economic consultancy Wellershoff & Partners found that US leveraged buyout funds are significantly overcapitalised.

Consultants were the most likely to increase their allocation to the asset class, followed by insurance firms and endowments.

The report put investor sentiment towards secondaries at 43, a significant drop from the 52 the strategy scored in the first half of the year. Rede said the fall was indicative of the amount of dry powder in the market and competitive pricing.

The findings were based on the views of 165 global institutional LPs, representing over €6 trillion in assets under management and approximately €1 trillion in capital allocated to private equity.