Co-investments are becoming an increasingly important route through which U.S. institutional investors access private markets, according to the latest edition of Cerulli Edge—U.S. Institutional Edition.
According to its analysis, as demand continues to grow, co-investment capabilities are no longer simply an option for asset managers: they are becoming a standard expectation and a key factor in attracting institutional interest.
“Within private markets, co-investments have emerged as a highly relevant alternative for institutions seeking to reduce the distance between pooled fund structures and direct asset ownership,” Cerulli notes. Its analysis concludes that a net 16% of asset owners expect to increase their allocation to co-investments over the next 24 months; 19% anticipate increasing it, compared with only 3% who expect to reduce it.
Cerulli points out that institutions use co-investments not only to reduce fees, but also to gain direct visibility into transaction analysis and structuring, as well as to strengthen their relationships with managers. According to Cerulli, management firms state that 42% of co-investment partnerships originated through direct relationships with asset owners, while nearly a quarter (24%) emerged through investment consultants and outsourced chief investment officer (OCIO) service providers.
Key findings
Its conclusion is that co-investments have become a fundamental mechanism for creating and strengthening these relationships. “Access to co-investments is now part of the initial manager evaluation process, rather than something negotiated separately after the investment has been made. Managers unable to offer this type of access are reducing their potential universe of limited partners, and not as a future risk, but as a present reality,” said Gloria Pais, Research analyst at Cerulli.
Another conclusion of the analysis is that intermediaries, consultants and OCIOs, deserve increasing attention. “Mid-sized institutions are increasingly accessing co-investments through intermediaries, gaining both cost advantages and access to transactions they likely could not originate on their own,” Pais added.
The expert noted that “proactively developing these intermediary relationships, rather than treating them as secondary to direct institutional contact, is increasingly becoming a smarter allocation of business development resources.”
