We believe co-investing with the right sponsors offers the same alpha potential as picking the right funds, from the LP’s perspective. For the past 20 years of private equity investing, upper-quartile managers have outperformed median managers by 820 basis points, according to Burgiss, thus illustrating the critical role manager selection can play in co-investing as well.
As the private equity co-investment market matures, it also offers more continuity. Today, our existing relationships with traditional sponsors (i.e., private equity managers who have a primary fund in which we are an LP) are the biggest source of co-investment opportunities and completed deals. In these relationships, we have the benefit of prior due diligence and a track record to the relationship, which allow us to keep our assessment of the sponsor – of their judgment, management style, and success – up-to-date and accurate. The sponsor also benefits from this continuity, as they can trust that co-investment partners have an established and transparent process for deal decisions, driving shared expectations.
But to source as broad a funnel of deals as possible and try to capture the most alpha, we have to be open to executing co-investments not just with traditional sponsors, but with emerging managers and fundless sponsors as well. As the chart below illustrates, emerging managers are a growing share of the private equity market over the last decade.