The view from the Co-investments team – Peter Knight Q2 2023

News: Insight & Opinion | 12 April 2023

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A full pipeline of opportunities highlights the value of co-investments to diversify our offering 

It’s often the case that during a lull in one part of the market, activity picks up in another, and that’s exactly what we are seeing happening right now. While deal flow appears to have slowed in the direct investment marketplace generally, as the pricing dip causes many to take a ‘wait and see’ approach, it’s accelerating in the co-investment space.  

The main reason for this uptick in activity is that fundraising has been subdued. Therefore, some fund managers are looking for co-investment partners to come on board, either to get specific deals over the line or as they syndicate down individual deals that have already been completed on-balance sheet. Others have decided to take the “fundless sponsor” route and raising capital purely on a deal-by-deal basis. 

As a result of this heightened demand for co-investors, we have a diverse selection of potential opportunities in our pipeline. These cover a variety of sectors, including manufacturing, logistics, specialist consultancies and non-bank lending. They range from early-stage companies to buyouts, creating a spread of returns profiles. And they encompass new and emerging as well as established managers. We’ve got some excellent businesses under consideration, and we’ll be picking a good balance of different options for clients to choose from this coming quarter. 

Given the recent turbulence in the banking sector, the opportunity set when it comes to investments in specialist non-bank lenders is under close review. We have some extremely strong contenders in this space in our sights, and our view is that recent events are likely to cause a retrenchment in bank lending, which could play well to non-bank lenders’ business models as they step in to fill the gap.  

Interestingly, we are seeing a higher than usual number of consultancy opportunities. These are often attractive because they are generally addressing a specific regulatory need from their client base and so are relatively immune to market cycles, and because they tend to offer ready-made buy-and-build opportunities for potential buyers, creating good exit prospects. And there can be diversity within the consultancy bracket – they can be very different types of businesses. Again, we’ll be assessing these carefully and presenting the right mix of opportunities to clients. 

The activity we are seeing highlights that co-investment is different from other kinds of single asset investing, with its own drivers and dynamics, demonstrating the value of Connection Capital’s diversified offering.