Co-investment rights in private equity funds: Here to stay — The PE Hub Network

Mary Abbott, John Groenewegen

Dec. 7, 2016

While deal volume is down in the private equity space, co-investments in private equity funds could be on the rise, according to an article in The PE Hub Network written by Osler partners Mary Abbott and John Groenewegen. In their article, Mary, a partner in Osler’s Corporate Practice Group, and John, Co-Chair of the firm’s Private Equity Practice Group, explain why the co-investment trend is gaining traction in the private equity space.

“What does it mean when your investor client becomes your competitor? For most funds, it means continuing to allow co-investment rights (and accompanying lower fees) in the hope that the large LPs will decide not to invest directly but rather be alongside the fund as a co-investor,” Mary and John explain in The PE Hub Network.  

“To withhold co-investment rights or structure or price them in a manner inconsistent with the market gives rise to the risk that these deep-pocketed LPs walk away from the fund.”

Mary and John go on to outline, in detail, why LPs and GPs may benefit from co-investment rights.

“Participation by large institutions in a co-investment capacity provides PE funds with the flexibility to execute large transactions without having to look outside their investor group for third-party capital,” Mary and John explain in The PE Hub Network. “In a world where deal flow is slowing, committed capital and the ability to show up at the table with a big cheque can make all the difference.

“From the LP perspective, co-investments can improve their prospects of boosting returns with more favourable fee arrangements and in a more controlled manner. For some, in particular those building out their own internal investment teams, co-investments offer the opportunity to invest alongside experienced GPs, and can give them experience in direct investment disciplines.

“Given all these positives, it is difficult to imagine that the co-investment trend will slow any time soon.”

Read more in Mary and John’s article “Co-investment rights in private equity funds: Here to stay,” in The PE Hub Network.