This article examines the business of co-investment in private equity as it applies to high net worth investors with a yearning for hands-on involvement.

A term that has become more familiar in recent years is “co-investment”, relating to how institutions and individuals can invest in areas that emphasise common interest. Sometimes, such co-investment is done to demonstrate a fund manager has “skin in the game” in making sure an investment is done diligently and lives up to its billing. Needless to say, what is meant by co-investment can vary – the devil is in the detail. In this article, Bill Nixon, managing partner of Maven Capital Partners, examines co-investment as it applies to private equity and self-directed high net worth individuals. As ever, the editors of this publication are delighted to receive such comments and urge readers to respond. This publication does not necessarily endorse all the opinions expressed.

(Maven Capital Partners was formed out of Aberdeen Asset Management in 2009.)

Asset management as an industry is undergoing fundamental change driven by a combination of the low yield environment, accelerating technological innovation, increasing investor sophistication and greater competition to provide best-in-class investor returns. In the wake of the global financial crisis, record low interest rates and low yields held down by expansionary monetary policy have forced innovation in fund management. 

Private equity is no exception, and one of the most notable market developments in recent years has been the emergence of the deal-by-deal investment model, whereby institutions and professional client investors co-invest alongside general partners in selected transactions, facilitating a bespoke approach to portfolio construction. 

A recent Preqin fund manager survey reported that over two thirds (69 per cent) of GPs now offer co-investment rights, while 18 per cent were considering adopting co-investment in the near future. Historically the attractions of co-investing for LPs range from reduced fees and deal-by-deal carry, to greater control and visibility over their private markets portfolio, while for private equity firms advantages include a more personal relationship with investors, as well as the opportunity to access new pools of capital and capitalise on additional investment opportunities.



The low return environment faced by institutions also holds true for HNW individuals. In light of current market volatility in the wake of the UK’s decision to leave the EU, investors are likely to turn to alternatives that allow them to diversify and help insulate against sharp moves in public markets. In this context private equity stands out as largely uncorrelated, offering access to high-growth or entrepreneurial companies that have proved they can survive stringent due diligence.

To open these opportunities up to HNW individuals, Maven has created Maven Investor Partners, a 250-strong network of professional investors geared towards co-investment. Prospective deals are sourced by Maven’s regional teams, which together review around 500 investment opportunities per year. A disciplined appraisal process quickly identifies those businesses that do not meet Maven’s strict investment criteria, with the remainder subjected to further detailed analysis. A select number of transactions - typically from six to 12 annually - which offer the required growth potential and target return profile for investors, are then put forward to investors, with detail of the diligence conclusions and investment case, who can then choose if and how much to commit to each transaction, ranging from £25,000 ($32,706) up to £1 million per investor.

The model is designed to give investors control over their capital commitments, both in terms of the selection of individual investments and the size of allocation, which marks a departure from traditional investments via funds. Such a move fits with the gradual ascension of the self-directed investor, which will only continue as younger generations accumulate wealth and embrace a more autonomous attitude to investing. 

However, one trade-off for greater control is higher risk - such an approach requires sophistication and understanding on the part of investors, who effectively construct their own portfolios in private markets rather than relying on the selection skills of a fund manager in shaping a diverse/balanced portfolio. Excessive exposure to high risk areas or very cyclical sectors such as financial services, or even through investing in specialist funds, may present an “eggs in one basket” risk, of which investors should be wary. However, generalist or multi-sector private equity managers will typically spread allocations across a number of investments and sectors, which mitigates some of this risk and reduces the overall volatility of the portfolio. 

Similarly, while this flexible investment model allows the investment to make deal-by-deal decisions and make greater commitments to high conviction companies, it also carries a risk of overweighting the portfolio, so the key is for each investor to have the appropriate investment knowledge to make an informed decision. 

An additional consideration is liquidity. Private equity investments tend to be highly illiquid and are typically realised at the conclusion of a holding period of three to seven years, once the investment manager has identified potential buyers. There is however no secondary market, or ability to divest before the manager or lead investor. Investors should therefore ensure that they can comfortably meet any of their personal liabilities over that period without an expectation of a windfall from realising the investment.

Maven’s UK-wide investment team sources a broad range of new investment opportunities, and where the investor partner model departs from institutional co-investment is in the structure and flexibility of the funding. Rather than add co-investment funds from LPs alongside a main fund, Maven is able to make investments wholly funded by its pool of investor partners. New regulations restricting the scope for venture capital trusts to invest in more established businesses means that a wider range of attractive investments, in larger, later-stage companies can be made available to Maven Investor Partners.

With yields depressed in many public markets, private equity investment also allows the use of innovative deal structures to provide attractive yields and shape the cash flows that an investor can expect over the lifetime of an investment. Maven takes an income-focused approach that involves using a significant element of secured loan stock, typically up to 70 per cent of an investment, generating an immediate paid yield of up to 12 per cent in order to mitigate the J-curve of an investor’s co-investment portfolio.

The migration towards co-investment is no longer restricted to the institutional investors who have perhaps dominated the co-investment landscape historically. HNW and professional investors can now emulate institutions and take a self-directed approach to private equity, investing flexibly to reflect their sectoral preferences and conviction in individual companies, and on better terms than would otherwise be the case. With interest rates at a record low, central banks potentially poised for further quantitative easing, and global macroeconomic uncertainty persistently high across more traditional asset classes, this offers an opportunity for strategic, niche investment planning for sophisticated investors.