Key Takeaways
- • Co-investment value involving sovereign wealth funds, pension managers, corporate investors and family offices rose nearly 39% year over year in Q1 2023 to $42.3 billion, according to S&P Global Market Intelligence.
- • Co-investments involving PE or VC firms partnering with SWFs accounted for more than 47% of co-investment deal value among the four LP groups since 2021, up from 31% in 2018–2020.
- • The median SWF co-investment rose 23% year over year in 2022 to $185 million, while the median pension fund co-investment plunged 81% to $52 million.
- • Macro conditions, including a slowdown in PE fundraising and tight debt markets, are pushing LPs and GPs toward co-investment as a source of equity for deals.
Summary
Sovereign wealth funds (SWFs) are leading co-investment activity in private equity as fundraising slows and dealmaking becomes more difficult, prompting limited partners (LPs) and general partners (GPs) to work together on more co-investment opportunities. According to an S&P Global Market Intelligence analysis, the value of private equity co-investments involving SWFs, pension managers, corporate investors and family offices increased nearly 39% year over year in the first quarter to $42.3 billion.
SWF activity has been especially prominent. Co-investments involving PE or VC firms partnering with SWFs accounted for more than 47% of co-investment deal value among the four LP groups since 2021, up from 31% in the 2018–2020 period. In 2022, the median value of an SWF co-investment rose 23% year over year to $185 million, while pension fund co-investments fell 81% to a median of $52 million. Although the total number of SWF co-investment deals fell 33% year over year in 2022, the 102 deals completed were well above the five-year average, which the source did not specify. Corporate investors partnered with PE and VC firms on the most deals since 2018, though those deals tended to be smaller.
David Fowler, co-head of the private equity product group at The Apex Group LLC, said SWFs are better positioned than pension managers, many of whom are working to resolve temporary over-allocations to private markets. He noted that SWFs have boosted private markets allocations in recent years and tend to have large deal teams, which suits co-investments that require greater LP involvement in due diligence and risk management.
Josh Beers, partner and head of private equity investments at NEPC LLC, said challenging conditions are amplifying the advantages of co-investments for both GPs and LPs. With debt markets constrained, deals requiring completion must often be funded with equity. Co-investments can help GPs avoid self-imposed single-asset concentration limits and offset reduced credit facility availability. For LPs, co-investments typically carry lower fees, and entering investments at a cyclical trough may enhance the upside. Beers added that newer fund managers use co-investment to attract capital amid a broader flight-to-quality among LPs. JP Morgan Asset Management's February private equity outlook had also predicted co-investment opportunities for LPs would grow in 2023 as GPs seek capital in a slow fundraising environment.
SWF activity has been especially prominent. Co-investments involving PE or VC firms partnering with SWFs accounted for more than 47% of co-investment deal value among the four LP groups since 2021, up from 31% in the 2018–2020 period. In 2022, the median value of an SWF co-investment rose 23% year over year to $185 million, while pension fund co-investments fell 81% to a median of $52 million. Although the total number of SWF co-investment deals fell 33% year over year in 2022, the 102 deals completed were well above the five-year average, which the source did not specify. Corporate investors partnered with PE and VC firms on the most deals since 2018, though those deals tended to be smaller.
David Fowler, co-head of the private equity product group at The Apex Group LLC, said SWFs are better positioned than pension managers, many of whom are working to resolve temporary over-allocations to private markets. He noted that SWFs have boosted private markets allocations in recent years and tend to have large deal teams, which suits co-investments that require greater LP involvement in due diligence and risk management.
Josh Beers, partner and head of private equity investments at NEPC LLC, said challenging conditions are amplifying the advantages of co-investments for both GPs and LPs. With debt markets constrained, deals requiring completion must often be funded with equity. Co-investments can help GPs avoid self-imposed single-asset concentration limits and offset reduced credit facility availability. For LPs, co-investments typically carry lower fees, and entering investments at a cyclical trough may enhance the upside. Beers added that newer fund managers use co-investment to attract capital amid a broader flight-to-quality among LPs. JP Morgan Asset Management's February private equity outlook had also predicted co-investment opportunities for LPs would grow in 2023 as GPs seek capital in a slow fundraising environment.
Go deeper than the headline
Research every firm in this story, track the ones that matter and get the daily briefing — free for 7 days.