Pension funds co-investing with private equity?

Question

Not a quant question, but not suited for Money stack exchange... I've heard rumblings of a trend of pension funds co-investing with private equity and was curious as to the reasoning of that strategy and if there really is a known trend.

I would venture a guess that the pension plans seek similar long-term horizons to private equity and that makes them natural partners and the benefit to the pension plan would simply be to not have to invest the entire amount of capital required for the deal.

Answer 1

Yes, this is increasingly prevalent in the endowment/pension world.

The key reasons for doing co-investments are:

1. Lower fees: Manager fees are more of an issue for endowments/pensions than ever, particularly since long-term expected returns (and recent realized returns of external managers) have come off significantly. Co-investments are usually offered with fee cuts.
2. More exposure to attractive deals: If a deal is super attractive, an endowment/pension may want a larger exposure to it than the pro-rated allocation. Coinvestment offers this extra exposure/enhanced expected returns without requiring additional allocation to the overall PE/VC.

There are other reasons, like enhanced control, etc. But the two reasons above are the most important considerations and there's no question that these deals are increasingly popular.