The power of co-investment

Protracted economic and geopolitical uncertainty mean buyout volumes have remained muted in recent years. Co-investment, by contrast, is booming. “We’ve observed the co-investment market experiencing strong levels of deal flow in recent years, despite overall buyout activity being more muted,” says Craig Stevenson, a partner at Lexington Partners, speaking on Private Equity International’s co-investment roundtable.

“There are a number of observable industry dynamics that are constructive for investors. In our view, this year’s market presents robust opportunities compared with past cycles seen over my 17 years in the industry.” The data supports this theory: Clodagh Coghlan, managing director at StepStone Group, notes that a 2024 StepStone survey of 145 GPs and 420 co-investments found that coinvest deal volumes have significantly outpaced overall M&A over the past decade. GP demand for the strategy is largely being driven by a tough fundraising environment and higher cost of debt, meaning managers are increasingly having to rely on third-party equity to complete deals.

Furthermore, co-investment is a highly effective marketing tool, according to Thomas Roche Toussaint, head of private equity secondaries and co-investments at UBS Asset Management’s Unified Global Alternatives: “Managers want to incentivize LPs to invest in their funds. They want to demonstrate their capabilities, and so they are offering co-investment as a way to kickstart conversations on the primary side, forging and strengthening those LP relationships.”

Dominic Blaxill, a partner at Debevoise & Plimpton, adds that while there are clear market drivers for the growth of co-investments, another factor is simply that the market is getting better at them. “Every deal is different, and we’re some way off standardization. But advisers are more practiced at spotting issues before they become problems. “GPs are rarely starting from scratch in terms of their own process, and LPs are able to move increasingly swiftly. Put that all together and it quickly becomes a more attractive deal type.”