Demand for co-investing among the world’s family offices of substantial wealth is set to increase over the next 12-months, according to new research by Campden Research.
The Private Equity and Co-Investing for Family Offices report, in association with global investment firm KKR, provides a deep-dive analysis into why key trends within the private equity and co-investing arena have occurred.
More than two-thirds (67%) of respondents said that family office demand for co-investment deals will likely increase over the next 12 months.
For the families surveyed, the report also found the most important criteria for choosing a co-investing partner was the potential partner’s track record for value creation (86%), followed by industry-related expertise (84%) and co-investing experience (84%).
However, a single family office principal based in North America told researchers when choosing a co-investment partner, trust was a more important factor than a proven track record.
“Trust is more important than anything for me,” the principal said.
“If I do not trust them, do not call me. I repeatedly tell my advisers this. I am not bothered about how experienced they are or how impressive their [track record] is. If I do not trust them, I will not be making any deal with them.”
Dr Rebecca Gooch, director of research at Campden Wealth, agreed that choosing the right partner was the key to co-investing and urged families to exercise caution.
"Find a partner you trust - even if this takes time – and make sure that your interests are aligned," she said.
"Leverage your network of personal contacts to create deal flow. Look for partners that have a track record of successful deals. Understand what specifically you want from a co-investing deal, what resources you can bring to the deal (other than capital) and how you can incorporate exit clauses, as this can help mitigate conflict. And ultimately – go with what you know – years of experience can pay off.”
More than 75 family offices globally completed a survey on the topics and senior family office executives discussed their experiences with private equity and co-investing in case studies.
Jim Burns, head of the Europe, Middle East, and Africa client and partner group and head of individual investor business at KKR, said family offices were increasingly using co-investments to invest in private equity while avoiding the high management and performance fees that private equity investments typically involve.
“Family offices continue to pursue co-investing and direct investing in private equity as a means to gain exposure to the asset class,” Burns said.
“While this can be an effective way to reduce the overall fee load associated with investing in private equity and allows investors to underwrite a single asset versus investing in a blind pool, co-investing/ direct investing requires patience, sufficient capital and significant investment in a dedicated team in order to achieve the desired outcome for any programme.”
Concerning family office co-investments, the second edition of the report also found:
Roughly half of family offices report that their private equity co-investment deals are focused in North America (51%) or Europe (49%), while a third are in Asia-Pacific.
Co-investment deal flow was originated by families forming partnerships with other investors—family offices and entrepreneurs—according to 71% of respondents, followed by in-house research and due diligence (48%), and professional advisers (44%).
More than half (57%) of respondents find co-investment opportunities most attractive amongst lower-middle market companies, followed by middle market companies (26%), with only 8% preferring upper-middle market and large cap deals.
On average, family offices expect a 14% return on their co-investment deals in 2018 and 17% in 2019.