Headwinds in the wider private equity market are tailwinds for co-investors, says Peter Knight
As we head towards the end of another challenging year for the economy, I’m pleased to report that our co-investment portfolio is performing well and to plan. This demonstrates that our disciplined selection approach, where we look for opportunities that are robust in the short-term as well as offering long-term growth potential, is appropriate for the current climate. It’s about choosing the right assets – but it’s also about choosing the right manager with the appropriate expertise for those assets.
Across the UK and European private equity industry, both deal values and volumes are down significantly on the same period last year (by 51% and 39% respectively in H1 20231) amid an extremely tough fundraising environment and difficulties establishing suitable deal pricing levels. However, the headwinds that the wider private equity sector is facing are tailwinds for co-investors. In fact, co-investment has been a very reliable, robust way for investors to deploy capital this year, and the prospects for 2024 – and beyond – look good too.
More expensive debt and depressed fundraising mean more and more fund managers are topping up their capital pools with co-investments and other liquidity innovations such as continuation funds and secondary vehicles of one flavour or another. So, for co-investors there are rich pickings to be had. And now that co-investments have become an established part of the investment ecosystem, it’s a route to deployment that’s here to stay.
Currently, we are particularly drawn to buy-and-build opportunities (or ‘platform plays’) in sectors where there’s a high degree of fragmentation and where there’s proven scope for consolidators to achieve multiple arbitrage with minimal execution risk - even in uncertain economic conditions. Sectors of interest include wealth management and pharmaceuticals.
Buying up several small operators at attractive valuations and creating something greater than the sum of its parts can turn out to be a virtuous circle, since it’s often the case that very little extra equity is required to fund additional transactions. However, as mentioned above, managers must have the requisite skills and experience to make this strategy work.
We are very conscious that real estate is also an important part of the alternative investment landscape for our clients, alongside private equity and private debt, and we continue to keep our eyes peeled for suitable opportunities. When they appear, we look forward to presenting them to our investor base, but for now, there’s very little activity in the commercial property market.
Overall, though, for those with capital to invest, co-investment is an avenue worth exploring due to its appealing dynamics, with plenty of opportunities there for the taking.