Co-investment
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Insights on Co-Investment
Co-investing involves multiple investors partnering on specific deals, often alongside a main investment fund, to share risk and potential returns. Here are some insights and strategies related to co-investing, based on various experts in the field:
Benefits of Co-Investing
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Fee Reduction and Returns:
- Jordan Stein from notes that co-investing can help to blend down fees and generate faster DPI (distributed to paid-in capital), which is crucial given the longer timeframes associated with companies staying private longer 1.
- James Williams discusses the appeal of quicker capital deployment and the potential for higher returns, aligning interests with general partners to ensure strong investment performance 2.
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Strategic and Thematic Flexibility:
- For firms like WE Family Offices described by Matt Farrell, co-investing serves as a risk management tool, allowing investors to adjust sector exposures and capture thematic tailwinds, like trends in AI or biotech 3.
Approaches to Co-Investment
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Selective Investment:
- Aakar Vachhani of emphasizes a deliberate approach to avoid adverse selection by being highly selective and waiting for the right opportunities, especially within relationships with smaller, emerging managers 4.
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Building Strong Relationships:
- John Merrill from highlights the importance of leveraging an ecosystem of strong general partners (GPs) to source co-investment opportunities, avoiding random co-investments and focusing on quality deals stemming from top funds 5.
- John Barber illustrates the success of building strong, transparent relationships, stating that despite initial skepticism, his approach has resulted in numerous successful deals by responding to the needs of partners without needing to be an LP in their funds 6.
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Managing Resources and Risks:
- Mario Giannini from emphasizes that most institutions may not be resourced enough to handle co-investments effectively. He suggests either doing all potential co-investments to ensure diversification or outsourcing them to specialists to manage risks 7.
Challenges in Co-Investment
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Resource Limitations:
- Many institutions lack the necessary resources to do co-investments properly, risking adverse selection and suboptimal returns. Proper structuring and a selective approach can mitigate these risks 7.
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ESG Considerations:
- The increasing emphasis on Environmental, Social, and Governance (ESG) factors adds complexity. There is often a gap between the proclaimed importance of ESG and the practical understanding and implementation of its principles in investment strategies 7.
These insights underline that while co-investing offers significant benefits, it requires careful strategy, strong partnerships, and adequate resources to navigate effectively.
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