INVESTMENT ACTIONS

The advantages of co-investments

Private equity co-investing is on the rise. Co-investing offers sophisticated institutional and high net-worth investors the opportunity to gain greater exposure to attractive assets but at lower fees—helping squeeze out better returns.

Benefits and challenges of co-investing

The post-crisis evolution of the private equity industry has seen an increased demand for co-investment capital. The potential for higher returns and fee savings drove the popularity of co-investments over the past decade. Co-investing also offers the ability to deploy capital at a faster rate while potentially mitigating the J-curve. Based on internal simulations, BlackRock estimates that a co-investment allocation of 20-30% can reduce the J-curve by 12-18 months.

Do co-investments pay off? A look at outperformance

Based on Preqin’s performance data, co-investment funds have outperformed direct private equity funds in nine out of ten recent vintage years based on median net IRR.

Private equity median net IRRs by vintage year: Co-investment vs. direct funds*

Private equity median net IRRs by vintage year: Co-investment vs. direct funds

Direct funds include buyout, venture capital, growth, turnaround, balanced and direct secondaries. Source: Preqin, derived on May 15, 2021. IRR is the annualized implied discount rate calculated from a series of cash flows It is the return that equates the present value of all invested capital in an investment (including allocated investment specific expenses) to the present value of all returns (including unrealized returns) or the discount rate that will provide a net present value of all cash flows, plus any residual value, equal to zero. The figures shown relate to past performance Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Do co-investments pay off? The impact of fees

Investors are increasingly enticed by co-investments’ potential for higher expected returns, which is largely a function of lower fees. A crucial difference between co-investment funds and traditional private equity funds is the economics behind the two transaction types. Looking more closely, the management fee reduces by two-thirds and the carried interest halves compared to investing in a traditional fund.

Distribution of capital comparing a traditional GP fund and co-investment fund based on a 2.0x total return (Multiple on Invested Capital)

Distribution of capital comparing a traditional GP fund and co-investment fund based on a 2.0x total return

Source: BlackRock Private Equity Partners. Gross deal level returns = 2.0x. Fund terms: 2% fee, 20% carry deal-by-deal, 8% hurdle. Co-investments terms: 0.75% fee, 10% carry European, 8% hurdle. Calculations based on $100m program and represent life-time estimates. For illustrative purposes only. Does not represent an actual product. It cannot be guaranteed that similar savings will be achieved in the future. The Gross MOIC is equal to (a) the cumulative distributions received from each underlying investment plus the current unrealized value of such investment, divided by (b) the paid in capital with respect to such investment. The figures shown relate to past performance Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

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BlackRock Private Equity Partners provide an in-depth analysis of the market for co-investments along with their benefits and challenges. Access these insights to understand the impact of fees on co-investment, and the pitfalls of market timing in private equity.
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Russ Steenberg
Global Head of BlackRock Private Equity Partners (PEP)
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Jeroen Cornel
Director, BlackRock PEP
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