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IMCO finds private credit sourcing efficiency with co-investments
by Lisa Fu
The Investment Management Corporation of Ontario (IMCO) is investing in private credit via co-investments sourced by asset manager relationships. The Canadian institutional investor says this is a more efficient method than building its own deal sourcing team.
“The complexity of the market has evolved to a point where that model [of directly originating your own investments] is actually now being reevaluated as to whether it’s the most optimal,” Fernando Martinez, managing director for global credit at IMCO, told Creditflux.
IMCO understood six years ago that the direct investing model in credit was not the most optimal path for the LP as it would never be quite as large as its Canadian peers. This is because IMCO’s client mandate is limited to the province of Ontario, Martinez said.
Instead of having a team that sources its own investments directly, the investor has an internal team that works on co-investments and underwrites private credit deals alongside managers. “We believe it is more efficient from a cost perspective and a sourcing perspective,” Martinez said.
This contrasts with some of Canada’s largest pension funds that have become famous for pioneering the ‘Canadian model’, in which they heavily rely on their own investment staff to directly source deals and manage investments. But a few of them are now reconsidering the cost of maintaining such programmes.
Last year, the government of Alberta fired AIMCo CEO Evan Siddall and the entire board of directors, citing concerns over cost trajectory, structure and poor performance. AIMCo also closed its New York office, which was used to source private credit deals, after evaluating its operational costs.
IMCO usually commits some capital to private credit managers’ commingled funds, then invests alongside that same GP in co-investment deals.
Most managers offer co-investment deals at low-to-no fees compared to traditional private funds, which charge both management and performance fees. This results in getting more direct private credit deal exposure at a lower cost.
If an investor does a good job underwriting the strategy and the funds that serve as a funnel for co-investment deals, then the hit rate for deals sourced via this method should be higher, Martinez said.
