LPs warm to fundless co-investments

Limited partners are increasingly seeing the benefits of investing on a deal-by-deal basis, according to the results of a survey seen exclusively by sister publication Private Equity International.

In a fourth-quarter survey of 112 limited partners, published by placement agent and advisor Asante Capital Group, 54 percent of respondents said they would consider making co-investments alongside a “deal-by-deal manager”, an investor that seeks out acquisition targets without having a fund to finance them.

While most respondents said they would not expect to pay fees or carry on these deals, one-third said they would be willing to pay where they do not have an existing relationship.

LPs were split roughly evenly over whether they would be willing to make co-investments alongside GPs with whom they did not have existing relationships with or invest only alongside managers with whom they had already made a fund commitment.

“The shift in investor appetite may be a reflection of the enhanced alignment of interests, flexibility, performance and specialisation that deal-by-deal managers typically provide as they compete for institutional capital against GPs with blind-pool vehicles,” Asante noted.

It also found that 59 percent of respondents expected to make at least five co-investment or direct deals per year, with 18 percent expecting to do between three and five deals, and 23 percent between one and two.

When it comes to choosing a GP, 54 percent of respondents said consistency of performance was the key metric, followed by strategy (47 percent) and team composition/organisational stability (46 percent).

“Not rocket science, but an important confirmation that consistency, and hence predictability, trumps high volatility in fund returns across multiple vintages, even where the overall median performance of those more volatile funds is marginally stronger,” the report noted.