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Custom vehicles offer range of options for co-investments
by Lisa Fu
Institutional investors, the huge pools of capital that have fuelled private credit to a USD 2tn market, often aspire to invest directly alongside fund managers. But many have been hampered by high cost and other difficulties — until perhaps now.
LPs wishing to co-invest are increasingly giving up some discretion to the GP by investing in custom vehicles. These can take the form of sidecars, separately managed accounts (SMAs), funds-of-one and special purpose vehicles.
“You run into every different flavour you might imagine in terms of discretion on the way in or not having discretion on the way in,” said Karen Simeone, managing director at HarbourVest. “There’s different treatment of fees. It’s going to be very investor-by-investor.”
Abu Dhabi’s sovereign wealth fund Mubadala announced last year that it had established a USD 1bn separately managed account to co-invest in private credit deals throughout the Asia Pacific region with Goldman Sachs Alternatives.
Connecticut’s office of the state treasurer agreed to commit USD 200m to an evergreen co-investment programme structured as a fund-of-one, according to a March presentation.
You run into every different flavour you might imagine
Karen Simeone
Managing director
HarbourVest
Meanwhile, the New Jersey Division of Investment is considering a commitment of USD 350m for an SMA and up to USD 200m to an HPS Investment Partners co-investment vehicle, according to a January memorandum.
“Because of timing issues and such, we like to have a [co-investing] vehicle set up, as opposed to an ad hoc co-investment,” Simeone said.
Most LPs are set up to invest in funds rather than individual securities, said James Gnall, senior vice president at investment consultant Wilshire.
So consultants offer to manage a certain amount of an LP’s capital with full discretion to freely invest across primary funds, secondary funds and co-investments.
“Interest in turning over discretion to a consultant has grown as the number of private credit co-investment opportunities have increased,” Gnall said.
Reliance on external advisors and asset managers is an evolution from the traditional co-investment model where LPs approached co-investment as a direct deal.
In this scenario, the GP presented the co-investment opportunity, and the LP used its internal staff to conduct due diligence, underwrite and execute. But this has been a challenge for most LPs, which do not have the resources or agility to rapidly approve co-investments.
