The significance of co-investment

As Cinven and Candover put the finishing touches to their joint E1.8bn Gala deal, a new research report highlights the importance of identifying suitable co-investors in order to maximise fund performance.

'Co-investors often have as much, if not more, influence on fund performance than a fund’s own GPs', so says a new report published by the Private Equity Funds Group of UBS Warburg.


“Taking the Private Equity Pulse”, explores limited partners perceptions of venture capital and buyout funds, as well as future plans for LPs’ private equity allocations. LPs were asked to list their priorities for choosing commitments, with the majority of LPs singling out historic top quartile performance as the key criterion. Team stability, deal-sourcing capability and quality were also cited as being of importance .


The lowest-ranked criterion for LPs was a fund’s ability to co-invest with other funds. However the report suggests that the role of co-investors is currently under-appreciated. ‘In looking at recent dealflow, co-investment has increased dramatically from recent years, a reflection of increased workload associated with unrealised investments,’ the report explains. ‘We believe that the quality of co-investors is a criterion which should not be under-recognised; co-investors often have as much or influence in fund performance than the fund’s own GPs.’


Matt Hocker, executive director of the UBS Warburg Private Equity Funds Group explains the significance: “Co-investment is effectively an investment in the capabilities of the co-investor. You are buying into the skillset of the fellow investor.”


Increasing deal size in 2002 has led to a greater level of co-investment. In addition to the recent Gala deal, the past twelve months has seen large numbers of co-investment alliances including Legrand (KKR, HSBC Private Equity, West LB and Goldman Sachs Capital Partners), Burger King (Texas Pacific, Goldman Sachs and Bain Capital) and Telediffusion de France, which was sold to a group of investors comprising Charterhouse Development Capital, CDC IXIS Equity Capital and the financial group Caisse des Dépôts.


Other findings from the report include a sense of pessimism amongst  LPs  over likely returns, with most respondents predicting a fall in both venture and buyout returns over the next five years, partially a reflection of the oversupply of capital compared with the number of ‘compelling investment opportunities’.


LPs are expected to stabilise their allocations in both venture capital and private equity, although twelve per cent of investors intend to increase their venture exposure, an indication that some investors may believe that reduced valuations (at 1996 levels) in the technology sector now make it an attractive prospect.


The report also indicates that LPs believe that mid-market buyout funds both in Europe and the US will have the most success while European and US late-stage venture capital will achieve the lowest returns.


UBS Warburg’s Private Equity Funds Group comprises 23 professionals in the US, UK and Japan.