Co-investing among family offices has been on the rise for some years and a report released last week indicates that this trend is growing. The Campden Research report says that two-thirds of family offices expect to see a rise in co-investing opportunities over 2019. I welcome this news as I think co-investing presents a great opportunity for pooling experience among family offices and for reducing risk by following more experienced investors, which is why I often encourage my families and clients to co-invest. For clarity, co-investing is where a minority investment in a company is made by a limited partner, in this case a family office, alongside a general partner such as a private equity fund manager or venture capital firm.
I first came across co-investing by family offices after the financial crisis when some were looking for new ways to allocate their capital and also to reduce costs. Essentially it was a way of moving away from funds to direct investing without taking on the costs of due diligence and the risk of being the only investor. It was also partially driven by the shortfall of funds where many failed to meet their fundraising goals during the crisis and were using co-investing as a way to attract investors. However this lack of sharing due diligence costs is also why funds are sometimes reluctant to offer co-investing rights. While some of the costs specific to the co-investment will be shared, the fund manager is normally expected to forego the usual management and performance fees based on the understanding that the co-investment is building on work already done by the firm and therefore the fees should not be charged to co-investors.
Co-investing also offers family offices the opportunity to be more actively involved in their direct investments without having to acquire and manage the investment entirely on their own. And for families that have deep expertise in a particular industry or sector, being able to use their knowledge can even lead to outperforming conventional investments in private equity funds. A survey of LPs conducted by BlackRock last year found that 68% reported their co-investments outperformed their traditional private equity funds.
LP Survey Highlighting Outperformance of Co-Investments vs. Funds.
It is also worth mentioning that in my experience many company founders and startups often prefer to work with family offices over VCs, so co-investments made by family offices and VCs can be attractive to them. While both are motivated by making a return, VCs can be more ruthless in their approach whereas family offices are generally long-term investors and willing to offer support and advice.
However despite its benefits, I couldn’t write about co-investing without mentioning its challenges. The main one for family offices is access to deal flow. Many family offices, even ones managing exceptional wealth, don’t have the dedicated resources to build relationships that form the basis of co-investing since the sourcing of opportunities is outside their traditional investment circle. This challenge is one Fidcuia Partners can help ease since we have a trusted network and can provide discreet introductions to investment opportunities and support deals to their conclusion.
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