Co-investments: the in-between step

If for whatever reason you can’t go all in, then co-investment might be a better bet.

Co-investing alongside a fund manager is a middle ground for pension funds that do not invest directly but still want more portfolio control and a greater say over assets

In a Probitas Partners survey of global institutional investors published last year, 33 percent of respondents said they were “actively interested” in co-investment opportunities, while 12 percent said they were looking at direct investments.

Marcus Frampton, chief investment officer of the $65.3 billion Alaska Permanent Fund Corporation, says the state endowment has about $507 million in infrastructure co-investments, which represents 20 percent of its total $2.1 billion portfolio. He says co-investments are likely to move to between 30 and 35 percent of the portfolio over the next three to four years, and that direct investing would require a “gigantic leap in resources”.

“I don’t think we’re at a place right now where we’ve got the resources to take that step from co-investment to direct,” he says. “I think anyone thinking about that should be pretty thoughtful about how different a world it is not co-investing with a sponsor.”

According to Frampton, fund managers to which Alaska Permanent had already committed funds began approaching the investor with larger transaction opportunities offered on a no-fee basis: “When you’re writing $20 million to $30 million cheques and doing deals with firms like GIP, which might be charging 1.5 percent management fees, you don’t have to do too many deals to pay for that headcount position.”

At $226.1 billion in assets, CalSTRS, the US’s second-largest public pension fund after CalPERS, manages the Inflation Sensitive portfolio, which is nearly 75 percent infrastructure.

Paul Shantic, director of the portfolio, says a “collaborative model” CalSTRS approved last year pushes for more co-investments and separate accounts, but in a measured way, “over time”.

He adds that a slow approach to becoming an active investor is necessary to “direct our resources to things we know we can do”.

“We probably passed on a number of co-investments before the first one,” says Shantic. “You just take it slow, get used to the pace and understand what your tasks are in terms of due diligence.”

Co-investments can open relationships with fund managers as well. “We become places of permanent capital that investors know is available,” Shantic explains.