Study: Co-investment to increase competition for deals

Fewer firms plan to raise capital this year, according to fresh research, which also found that nearly half of them plan to offer deal-by-deal fund structures this year.

The increasing role played by co-investors is likely to stiffen competition in the coming years, according to a recent study. 

Rothstein Kass, a business services firm, polled 215 private equity firms on their expectations for 2013. It found that 78 percent of respondents, which comprised managers from a wide array of sizes and geographies, expected an increasing number of LPs to invest directly in private equity deals. 

“Investors, particularly institutional investors, have developed some degree of distaste for giving others complete authority over their assets,” noted Tom Angell, principal in charge of Rothstein Kass’ private equity practice, in a statement. “This trend has manifested in a surge of separately managed accounts within the hedge fund industry and an increasing number of co-investments within the private equity space.”

Investors, particularly institutional investors, have developed some degree of distaste for giving others complete authority over their assets

Tom Angell

The report also stated that fewer firms were planning a return to the fundraising trail this year, with 33 percent saying they would not fundraise in 2013. That compared with 27 percent last year. 

Nearly half the funds also were tempted to offer deal-by-deal fund structures to their investors, in a drive to cede more control to their LPs over investments without sacrificing management fees. 

“While the amount of money being directed to private equity funds is increasing, it’s interesting to note that the number of funds receiving capital has remained fairly steady and has yet to return to pre-crisis levels,” commented Jeff Somers, principal in charge of the Rothstein Kass’ Boston office. 

That was despite GPs being relatively upbeat about both prospects for deals and exits this year, according to the study. Around 70 percent of firms polled thought 2013 would offer more attractive investment opportunities than 2012, whilst 60 percent believed there would be more options for exits. Despite an expected pick-up in IPOs, these would mainly consist of M&A transactions, respondents said.  

They also believed increased activity would translate in staff additions over the short to medium term, with just over half of surveyed firms planning to make new hires this year.