As investors push for lower fees and greater autonomy, co-investment has become more than just a tool for financing expensive acquisitions.
Managers are offering up favorable sidecar terms to investors that make big, early commitments to their comingled funds. In some cases, these opportunities are being made available to outside investors by managers looking to build relationships and secure future capital.
Investors, meanwhile, are chasing these deals to get direct exposure to high-performing assets and exercise greater control over their portfolios. It also gives them a chance to save money, as co-investments often come with significant discounts to management and carried interest fees.
Elite fundraisers can reward loyal partners with co-investments opportunities while smaller managers are able to dangle them in front of potential investors to compete with ever-growing giants such as Blackstone, Brookfield and Starwood. For the savviest – and wealthiest – investors, it means a plethora of new opportunities to deploy capital.
However, not everyone is able to get a slice of the swelling co-investment pie. Smaller investors are left to negotiate for co-investment rights they will not be able to use. Managers risk making limited partners feel jilted by extending co-invest opportunities to others. For consultants, conflicts of interest can be difficult to avoid.
To examine how and why co-investment has changed in recent years and what the private real estate industry is doing about it, PERE spoke to dozens of industry professionals and examined statistics from our own database as well as other market observers. These are our findings.