A good set of universal LP co- investment data is hard to find but Cambridge Associates gave it a try in a new study analyzing LP/GP co-investment returns. They looked at over 500 co-investments done by over 40 co-investment funds and fund of fund managers, delving deeply into 100 cases. They found that buyout-focused co-investment fund portfolios outperformed global buyout funds in seven out of 10 vintage years.
Overall, not quite half of co-investments outperformed the sponsoring GP’s fund. Co-investment returns have the potential to outperform private fund investment returns and provide alpha. However, co-investing does not guarantee private equity return enhancement, say the analysts. One caveat Cambridge offered was to warn that when co-investment activity is booming and distributions are high, it can be tempting for LPs to double down on co-investing, but that is actually the time to be cautious because entry valuations at such times tend to be higher and very competitive. Based on that insight and the charts above, LPs co-investment activity has in fact been following the momentum in the market, rather than investing counter-cyclically. According to Cambridge estimates, LP co-investment activity accounts for upwards of 5% of overall private investment activity. (Image source: Cambridge Associates)