Study Finds Co-Investment Risky for LPs


April 3, 2014

The debate about returns in private equity continues unabated this week. Under the microscope this time, is co-investment returns achieved by limited partners. A new data-driven study from Altus Associates, which manages and advises USD 26.7 billion for institutional investors, claims to “expose the shortcomings” of co-investment portfolios.

Using a sample of 886 realized US buyout and growth investments ranging from 1979 to 2010 and a co-investment portfolio comprising 10 assets, the study found that “there is a substantial probability that the entire portfolio would generate an IRR below 0%”.  The authors added that even with 20 company co-investment portfolios, “It is still possible to lose significant capital as measured by either IRR or multiples”.

Altius, which is also a fund of fund manager, warned that the “dispersion of returns indicates that there is a probability that the returns could be poor, even across an entire portfolio”. The weaknesses of the co-investment model include adverse selection and portfolio concentration, according to Altius Associates. (Image source: Altius)

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