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Co-investment will continue to play a crucial role in private equity despite the present macro environment.

Markus Benzler, Head of Multi-Managers Private Equity

There is less capital available in the market generally. We are hearing that fundraising is becoming more difficult, even for strong managers. In many cases, investors are keen to preserve those relationships – they just have less money available to do so. A key contributor to that is the denominator effect. At the same time, there is a degree of uncertainty about how private equity is going to perform in the short term.

Investors are shifting allocations into their fixed-income portfolio. In the past, those investors had nowhere to go except equities and alternatives – now there is a third option. For these reasons, fundraising is taking longer and becoming more challenging. It also means there is less capital available for co-investment in the short term.

Having said that, the secular case for co-investment remains the same: co-investment enables investors to reduce their total expense ratio by participating in deals on a reduced or no-fee, no-carry basis. Investors can also tailor the investment approach to their risk appetite and allocation targets, or just boost their returns by selecting suitable co-investment opportunities.

In the short to medium term, I think demand for co-investment partners is only going to grow stronger. I anticipate that many fund managers won’t reach their targeted fund size in the current market environment; to remain in the same deal segment, these GPs will either need to execute fewer deals or turn to co-investment.