Co-investment is a very flexible way of investing that allows us to take a highly selective approach, and to be opportunistic where appropriate: all of which play well to the strengths of our business model, while opening up new avenues of opportunity to our client base, says Peter Knight, Head of Co-Investments.
It has long been part of the Connection Capital offering to provide access to co-investments alongside top-tier fund managers in select, single assets. Examples of co-investment deals we have completed in recent years include: UK banking fintech Thought Machine Group, alongside deeptech investor IQ Capital; and co-investment in the off-market £265m management buyout of Essential Pharma, a UK-based generics pharmaceutical business.
We now feel that the time is right to focus more resources on this exciting route to deployment, which leverages our fund manager relationships to gain access to single asset transactions across venture, mid-market private equity, private debt and property. I’m delighted to be heading up this new dedicated strand to our business, where I believe there is significant scope to cherry-pick the best assets strategically from fund portfolios. For us, this is a way of differentiating and further diversifying the types of investments we present to our clients to put them in the best position to build a well-balanced and highly-performing portfolio themselves.
Co-investing allows investors to be specific about what assets they want exposure to and when, to fit with their own portfolio composition, liquidity requirements and risk profile. Investing alongside a specialist fund manager also provides an extra layer of expertise and due diligence. In this way, it’s complementary to what we already do in the Direct Deals and Funds spaces, but by bringing the two together we can bring new types of deals to clients that they would not otherwise have access to.
For example, our co-investment strategy will, for the first time, enable clients to participate in larger deals on a single asset basis than we typically target with our own-led lower-mid market transactions. Co-investing in specific fund assets, where capital is drawn from a much larger pool, will raise the overall cheque size and make participating directly in private companies which sit firmly in the middle and upper-middle market, possible.
Co-investments will also allow us to offer single-asset investment opportunities in late-stage venture/early-stage growth companies, where we will be targeting those ‘winners’ that have already identified themselves. These are the star performers that are expected to deliver the bulk of returns for fund portfolios but that are especially cash-hungry. VC fund managers may therefore be prepared to offer co-investment opportunities in order to fully take up their pre-emption rights, in a way that allows them to maintain their level of influence with the company.
As before, alongside these new areas of focus, we will be considering good opportunities that fall in between these two ends of the scale, looking at a range of different investment strategies across the alternative asset space.
Taking the co-investment route relies on strong relationships between investors and fund managers. We will cement our close partnerships with best-in-class managers we have previously worked with, but we’ll also be casting our net wide to seek out good opportunities and forge new relationships too. One area of interest is the growing trend for ‘fundless sponsors’ – general partners (GPs) who do not manage a blind pool fund but instead raise all their capital on a deal-by-deal basis.
Co-investment is a very flexible way of investing that allows us to take a highly selective approach, and to be opportunistic where appropriate: all of which play well to the strengths of our business model, while opening up new avenues of opportunity to our client base.