The January draft of an academic paper co-authored by Josh Lerner, professor of investment banking at Harvard Business School, finds that for seven institutional investors studied buyout and venture capital co-investments performed worse than fund investments over a 20-year period. Adviser Altius Associates weighed in on the subject this spring, revealing results of a study of 886 realized buyout and growth investments over more than 30 years. It found a ”substantial risk of generating poor returns, even with a reasonably sized co-investment portfolio.”
But StepStone, a fast-growing advisory shop that offers investors co-investments through separately managed accounts, has done research showing co-investments in a more favorable light. In a presentation delivered at the PartnerConnect East conference hosted this March by Thomson Reuters (publisher of Buyouts), Partner Michael Elio took the audience through results of a study of 385 small, mid-market and large-market buyout co-investments around the world from the firm’s proprietary database (including both deals it has done and ones it has passed on). All told, 96 sponsors completed the deals between 2000 and 2012.
The advisory shop grouped the co-investments into vintage years to better compare the performance of co-investments with fund investments; the 57 co-investment deals completed in 2000-2003, for example, were grouped into a vintage 2000 collection. That led to the creation of 10 vintages altogether, 2000 to 2009, with vintage 2009 reflecting deals completed from 2009 to 2012. Using the Thomson Reuters global buyout benchmark for comparison, StepStone found that the estimated net TVPI (total value to paid-in capital) for nine out of the 10 vintage co-investment pools would have been top-quartile, while just one (the 2004 vintage) would have been second-quartile. The firm assumed a fee structure of 1 percent management fee and 10 percent carry on the co-investments and presented results on an equal-weighted basis.
To address concerns about adverse selection—that sponsors may be offering co-investments on their less attractive deals—the firm also looked at the percentage of co-investment deals that outperformed their parent funds. Overall, 59 percent of the co-investments studied did outperform their parent funds net of fees, while 48 percent outperformed their parent funds on a gross basis. The research did, however, find a slump in co-investment performance relative to parent fund performance during the credit bubble years of 2006-2008. Overall, according to the presentation, “co-investment transactions generally perform on par with their parent fund,” suggesting no adverse selection.