Limited partners believe they are ill-equipped to make successful co-investments, according to a survey by Coller Capital, released on Monday.
Five out of six LPs, or 84 percent, believe they lack the skills, experience and processes to make successful co-investments, according to Coller’s Global Private Equity Barometer Winter 2015-16, which polled 114 private equity investors globally.
An inability to meet tight co-investment deadlines was the main challenge, with 71 percent of respondents citing this as a reason. More than half of them also cited limited understanding of co-investment performance drivers as a reason, as well as an inability to recruit staff with the necessary skills.
“As an LP, you’ve got to decide what your co-investment strategy is,” Stephen Ziff, a partner at Coller in London, told Secondaries Investor. “Are you going to be active or passive? Are you going to participate early on in the investment process, or are you going to be a follower?”
Co-investments in secondaries posed additional challenges, he said.
“LPs say that the tight deadlines for co-investing is a challenge,” he said. “If you’re investing or co-investing across a secondary transaction, by definition it is a portfolio exposure, whether it’s a portfolio of companies, or of LP positions. You have to be even more expeditious to get your arms around a portfolio in the same time frame.”
Co-investments have been popular this year across private equity strategies. In the secondaries space, Strategic Partners raised an undisclosed sum from LPs wanting to co-invest in the deal involving the California Public Employees Retirement System $3 billion real estate portfolio. Ardian held a final close in November on €1.1 billion for its fourth co-investment vehicle that will make direct investments.
The survey also found two in five LPs believe special accounts pose conflicts of interests. Only 18 percent of respondents said they were a positive development.
“Where you’ve got two pools of capital with the same general partner, there is a potential conflict of interest because as a GP, you’ve got two task masters who you’re responsible to,” Ziff said. “LPs are aware that special accounts can create conflicts of interest and GPs need to be able to manage that conflict.”