China LPs trying out co-investments

LPs independently co-investing alongside GPs is increasingly common in China.

More than 75 percent of China’s 6,000 LPs have had some sort of involvement in co-investments with GPs – a trend that is likely to encourage more cooperation between the two parties, according to a recent Zero2IPO study.

Although the investment capacity of China’s LPs amounts to $780 billion, China’s private equity industry has been rather inactive compared to 2011, the study says. A big part of this, the study concluded, is an increase in LP co-investments.

“[The LPs] now see that they themselves have investment capability, and they don’t want to only earn money through [GP] funds,” said Amanda Liu, an analyst at Zero2IPO. “So they go invest in some companies on their own.”

Indeed, many Chinese private equity firms encourage a co-investment structure. According to the study, almost 50 percent of private equity/venture capital firms believe such co-investment will help grow the businesses, and 43 percent believe it will improve relations with their LPs.

“[The LPs] can now choose to cooperate with the GPs, and co-invest with them,” Liu told PE Asia. The LPs’ choice for co-investment always follows the choice of the GPs, she added.

Co-investment is particularly helpful, Liu said, in a market where returns are difficult to produce. The IPO market in China has been “cold” this year, Liu said, but co-investment will help LPs pay more attention to the companies themselves.

Co-investment, however, still remains a minor part of LP activity. The study shows that for more than 82 percent of Chinese LPs, co-investing was 30 percent or less of their total activity.

The October edition of PE Manager, out now, features an in-depth report on how investors’ heightened demand for co-investments has amplified certain legal and operational risks for GPs. Contact Jose Thorne at for subscription details.