PEI IR Forum: with co-investments, ‘track everything’

The SEC is cracking down on co-investment offerings, and GPs need to be sure they document all aspects of the allocation process, according to panelists at the PEI IR Forum.

With the US Securities and Exchange Commission (SEC) upping its scrutiny of private equity co-investments, GPs should be prepared to track every aspect of their co-investment allocation process, said panelists at PEI’s Investor Relations Forum on Tuesday.

“Make sure you track co-investments like a mini-fundraise,” noted one GP panelist. “Make note of what you’ve shown prospective co-investors, if they didn’t invest, and why.”

The GP added that, so far this year, two LPs have asked her firm for co-investment data with very specific questions about who was shown what deals and when. Having all that information on hand is vital, especially if the SEC were to drop by.

The panel agreed that the co-investment offering process is still relatively discretionary and not yet handled on a total pro-rata basis, but a second GP panelist noted that she could envision a world “where it does become that stark.” The key to preventing such a reality is communication: being able to articulate your allocation principles clearly, not only to all LPs but also to regulators.

One of the hot-button questions when it comes to co-investment allocation is whether or not GPs will allow LPs who are not committed to the main fund to co-invest. An audience poll revealed that only 30 percent offered to third-party LPs, while 70 percent did not.

The panelists provided a slightly different perspective on this trend. Both GPs noted that they do offer co-investments to third-party LPs, but give existing LPs precedence. Both LP panelists stated that they have participated on a third-party basis, and while that may become complicated from an economics standpoint, it does offer its advantages.

“It gets you comfortable with that GP,” said one LP. “There have been GPs where we wouldn’t have given them LP commitments later on if we hadn’t gotten to know them the way we did during a co-investment first. It can be a good way to expand your LP base.”

Many of the audience questions during the panel focused on another crucial co-investment factor: fees. While most of the panel offer or invest on the typical no management fee/no carry basis, the LPs noted they are comfortable paying certain up-front transaction fees. The panel was quick to note that co-investments have become much more than the fee mitigator they used to be for many LPs—they are now a very strategic move used to better understand the both investments and the GPs involved.