Future returns: why high net worth investors co-invest in private markets
High net worth individuals and families often invest in private businesses through private equity and venture capital funds. In exchange for locking in their money for several years and paying high fees (typically a 2% management fee on managed assets and 20% of profits on the sale of fund companies), investors get returns at two digits.
At Commonfund Capital, the private markets arm of Wilton, Connecticut-based asset management firm Commonfund, family offices and high net worth individuals are increasingly taking another route to private markets by co-investing, says Peter Burns, branch manager President and CEO.
Co-investment is investing alongside a private equity or venture capital fund, but only in a single company rather than in the fund itself.
It’s a practice that can give fund managers flexibility, allowing them, for example, to make larger investments than they could comfortably do with their fund, Burns explains.
For example, a manager who has raised a private equity fund of US $ 300 million with the intention of making 10 investments averaging around US $ 30 million each might look to a co-investor for additional liquidity if an investment required US $ 50 million, he says.
Penta recently discussed with Burns the benefits of co-investing for investors.
Burns says the strategy works well for those who want to invest more capital with managers they like and find effective.
It is also a good strategy for investors who wish to concentrate their private capital in a specific sector of the market. “If you think healthcare is the wave of the future, you can concentrate the capital in it,” he says.
An investor in 10 private equity funds, where each fund invests in 10 to 20 companies, could end up with exposure to 100 to 200 companies. Because a co-investment is not a blind pool, “you can decide, ‘I like this business and I’m going to concentrate the capital with this business,’” says Burns. “You can more easily shape the industries you love with the managers you love. ”
The main reason many families and individuals co-invest is for what Burns calls a “better economy” – this is because the costs of co-investing are usually waived or reduced and, therefore, the potential for returns. is higher.
The fees are lower because a fund manager typically uses clients to co-invest who are already investing in their private equity or venture capital funds.
The reduced fees are the reason more and more high net worth individuals and families are considering co-investments. But Burns cautions clients to always make sure they are investing in quality businesses with the potential to deliver good results.
A diversified option
Because Commonfund Capital works with a number of funds, it has the ability to co-invest alongside multiple managers on its platform of privileged opportunities in the private market. For clients, the company can then offer a stand-alone strategy consisting of a “basket” of co-investments, effectively offering them the advantages of diversification – as with a fund – but at a lower cost.
“We work with a lot more funds than a typical family office would,” says Burns. “If they work with us, they take advantage of our platform and access our transaction flow. ”
Family offices and high net worth individuals can also access co-investments through Commonfund Capital by investing in one of its core strategies, which include private equity, venture capital, real assets and sustainability, which all include a part in co-investments, ”he says.
Commonfund Capital’s objective within private equity is buyout funds and growth stocks. Within the business, the company is primarily focused on information technology “and everything related to it,” from cloud and mobile phones to business software, Burns explains. They avoid companies with no income or with unproven technologies.
The company is also investing in environmental sustainability “at a later stage,” seeking companies that develop products and services related to the global transition to renewable technologies, energy efficiency and sustainable agriculture, says he.
“We’ve found that some investors want a real asset solution in terms of asset allocation, but they don’t want to invest in oil and gas,” Burns said.
The hope is that Commonfund Capital’s basket of co-investments will surpass that of a private equity fund, he says. This is possible because the company has a “large funnel” of options, which it narrows down to the most attractive opportunities.
“In theory, our rate of loss, or low rate of return, should be lower if we do a good job of choosing from what is a strong group of companies and choosing the best of the best,” he says.
Health and “mature technologies”
Although the co-investment basket option offered by Commonfund Capital is diversified, it focuses on certain sectors, including healthcare and so-called mature technology companies. Both sectors play an important role in the US economy and are growing faster than the others, Burns says.
“You have a built-in tailwind in those areas,” he says. “Specifically in health care, you see a push to cut costs. ”
This push is leading to innovative options, such as televisiting, moving routine surgeries to less expensive locations, and providing more home care options for elderly patients.
Mature technologies, compared to early-stage technologies, are focused on improving existing options, such as building software that can streamline business expense reporting, he says.