Limited partners remain interested in co-investment opportunities even as deal multiples creep higher. The attractiveness of blending down the cost of capital appears to present an irresistible call to investors.
That’s not exactly a foregone conclusion. Rising deal values have made limited partners more wary of general partners’ approach to deployment. LPs are increasingly focused on earnings growth relative to multiple expansion, and are cautious about ballooning leverage levels. The resulting scrutiny has helped spur churn in LP-GP relationships, with a substantial uptick in LP refusals to re-up earlier this year.
Getting fewer co-investment opportunities, however, is also a prime reason for the churn, and current market conditions still bear this thesis out.
“For LPs there’s a huge appetite for co-investment on a cost-effective basis because they can blend down the cost of capital,” says Traub Capital Partners co-founder Brian Crosby, whose firm’s inaugural acquisition brought in LP capital on a co-investment basis. “Those co-investors are looking to deploy capital with known and trusted investors or GPs, so they like doubling down on existing managers. We’ve also felt this dynamic with co-investors.”
Churchill Asset Management recently closed on a new private equity fund, telling Mergers & Acquisitions its co-investment vehicles have deployed $2.6 billion “across 195 equity co-investment transactions since 2011.” The sheer volume of deals implies the trend is still in full swing.
“LPs are looking to deploy more capital but it’s more difficult to do heavy direct co-investment themselves,” Crosby notes. “It’s difficult to find interesting deals; time consuming to diligence, structure, and close deals.”
For now, the incentives may well outweigh the costs for limited partners.