“Stapled” deals are not the sole preserve of the secondaries investor. Fundraising discussions now include references to stapled deals, whereby commitments made to a blind pool must be accompanied by a co-investment opportunity. Some LPs, one placement agent says, insist on such deals or will not invest at all.
For the LP, investing directly alongside a general partner promises reduced fees, concentrated exposure to particular managers and the scope for greater control over investment pace.
For the GP, co-investment is often a necessary but bitter pill to swallow that smooths the path to fundraising. Some even promote it as a key reason to invest. Castik Capital was able to close a first time fund on a sizeable €1 billion in August, enticing its six investors with its “significant co-investment potential”.
And then others, like US mid-market firm Tailwind Capital Partners, have catered to the specific appetites of key investors by launching separate co-investment vehicles. Tailwind Capital Partners II Co-Invest B took $50 million of commitments from only the California Public Employees’ Retirement System (CalPERS) to invest alongside Tailwind’s second flagship vehicle. CalPERS has committed $150 million to Tailwind Capital Partners II, according to PEI Research & Analytics.
For managers, co-investment is a long term play. It helps build close relationships with LPs, and vitally it encourages new LPs to come on board. The tension created for managers seeking to assign opportunities and/or manage LP expectations is material. There is scope to offend LPs that are not offered co-investment opportunities first (or at all) or opportunities that are in line with their preferences. The lack of transparency around how opportunities are allocated also frustrates investors.
And from a GP perspective, the concern remains about the gap between an LP’s appetite and its ability to execute a deal within the timescale required.