The Shift to Outsourced Co-invest Operations: A Growing Trend
In recent years we've seen a number of mega investors pivot to outsourcing their co-invest operations to an asset manager to address issues caused by limited internal resources and/or less than nimble investment processes. As this trend continues to grow, we wanted to take a few minutes to consider why such outsourced co-invest arrangements can be attractive from the perspectives of both fund investors and sponsors.
The Challenge: Internal Constraints and Investment Processes
As we've noted in prior commentary, both fund investors and sponsors have accepted the mutual benefit offered by co-invests. Mega investors, in particular, have embraced the opportunity to participate alongside core relationship GPs, gaining added exposure to deals on a no-fee, no-carry basis.
Some investors, however, have been stymied by internal staffing constraints. Bluntly, they may not have the internal resources – headcount and/or industry expertise – to properly evaluate co-invest deal flow. Other investors are hindered by their internal investment processes, which may make it hard for an investor to evaluate a co-invest opportunity on the timeline requested by a sponsor.
For these and other reasons, a meaningful portion of the LPs who tell sponsors that they are interested in co-invest opportunities at the time they make their initial fund commitments do not actually proceed with such opportunities when presented with live opportunities.
The Solution: Outsourcing Co-invest Programs
One solution is for an investor to outsource its co-invest program – basically retaining a third-party sponsor to evaluate and manage co-invest opportunities. Not only does this address the internal resource issue, but it also shifts the investment decisions for individual co-invest opportunities from the LP to the third-party sponsor, providing an escape hatch from more burdensome and/or time consuming internal processes.
Symbiotic Benefits: Strengthening Relationships, Diversification and Increasing AUM
From a sponsor's perspective, these outsourced co-invest programs are attractive as a way to solidify and expand upon relationships with mega investors and add to the sponsor's AUM. They also often offer added economics for the sponsor.
Depending on the negotiated terms of the arrangement, the sponsor also may have the ability to reallocate some portion of co-invest deal flow across its co-invest program more broadly, meaning that servicing an outsourced co-invest program can provide benefits to the sponsor's broader investment offering.
Conversely, these programs may allow the outsourcing investor to participate in the sponsor's independently sourced opportunities. This potential for added diversification for both the outsourcing investor and the sponsor's platform more generally make these relationships even more symbiotic.
Given the benefits for both fund investors and sponsors, the outsourcing of co-invest operations is a trend we expect to see continue.
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