Co-investment is a fast growing area of private equity – and one in which we have over three decades of experience. Find out more about our approach.
By David Maréchal Deputy Head of PE & Co-Head of Europe Pictet Asset Management.
With lower costs than traditional private equity funds, as well as attractive returns, co-investments are growing in popularity among pension funds, insurers and other sophisticated investors. At Pictet, we have honed our skills in co-investment for more than 30 years, giving us the experience to identify the best opportunities and avoid potential pitfalls.
A wide and well-nurtured network of general partners (GPs) is crucial to getting access to the most promising deals – not least because GPs typically tend to offer co-investments to their most trusted partners. Due to our extensive private equity investments, we have active relationships with over 90 GPs and in the majority of cases we benefit from advisory board seats – deepening the relationship and better aligning our interests. Our proactive sourcing efforts (through more than 650 meetings organised every year) have been instrumental in driving co-investment deal flow.
Thanks to this network, each year we have access to around 300 co-investment opportunities. By combining the lead sponsor’s independent analysis with our own research into the specific companies we can ensure greater confidence in the margin of safety and ultimate potential performance. Our investors, thus, benefit from a two-layer due diligence process.
The best deals
Of the deals offered, we review around 90 of the most promising, and then seek to invest in approximately the 25 best companies each year, aiming to achieve exposure to a wide range of sectors, geographies, investment stages and GPs.
Our preference is for high-quality and profitable businesses which benefit from large addressable markets, with the potential to go even further through identified goal-driven growth paths and multiple levers for value creation. Selecting market-leading companies that enjoy pricing power is also an important consideration, particularly in the current environment of heightened inflation.
It’s important to emphasise that we are not top-down investors who start with sectors. Instead, we seek to back companies to help them achieve their full growth potential after applying the investment criteria we have refined over more than three decades. These criteria begin by aligning with top-tier private equity managers as the lead sponsor, who have deep sector experience, a strong focus on operational excellence and value creation, and a demonstrable track record across multiple cycles.
With those co-investment partners, we are also looking for a first-class management team with a cautious approach to financial leverage.
Geographically, some of the most attractive opportunities can be found in North America, Europe and – to a lesser but growing extent – Asia. Among industries, we see strong potential in services, healthcare, tech, industrials and consumer (not least in areas of sustainable consumption and circular economy).
Private equity investors are also in a good position to capitalise on the green transition, by investing in companies which contribute to a reduction in greenhouse gas emissions, reduce pollution and which develop enabling technologies.
Recent co-investments, for example, include a European provider of software for property management and a leading manufacturer of over-the-counter vitamins, minerals and supplements, with a portfolio of strong brands.
Figure 1 – Co-investment track record
Multiple on invested capital (MOIC) on realised each individual co-investment since 2002; realised transactions shown from the least performing to the best performing
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Source: Pictet Alternative Advisors, as of 30.09.2024. Capital weighted performance. For discussion and illustration purposes only. Total may not sum due to rounding. Past performance is not indicative nor a guarantee of future results, and there can be no assurance that any current or future Pictet funds, or individual investments, will achieve comparable results. Performance and returns may increase or decrease as a result of currency fluctuations. All forms of investment involve risk. The value of investments and the income derived from them is not guaranteed and it can fall as well as rise and you may not get back the original amount invested. MOIC compares an investment’s value on the exit date to the initial investment amount. A MOIC below one means the invested amount has lost value.
Local nuances
It’s important to know the nuances of each market when selecting investments. Take the education sector. It’s a fast-growing industry, and much of private equity investment is focused on ed tech. But, with deeper knowledge, you can uncover other opportunities. For example, while in the UK most ambitious school leavers aim for state-owned universities (not easily accessible for investors), in Switzerland, almost two-thirds follow the vocational route, which is well-respected and well-rewarded, and served by private companies.
We capitalised on this trend by backing a company offering evening classes and diplomas to people already in their professional career, helping them advance further. In a fragmented sector, this company was the clear leader in the business segment with no competitor with similar market share and a long tail of smaller operators – creating potential for attractive acquisitions, and for new curriculum offerings.
Since our investment, the company has broadened its offering considerably through acquisitions, in particular into other business specialisms like marketing or HR but also into alternative medicine and complementary therapies. The management team has also been significantly strengthened.
The Swiss educational company was an example of a buyout deal – investment in mature companies with positive cash flows, often leaders in their fields. This relatively low risk type of private equity strategy forms the bulk of our co-investment portfolios, but we believe it is also important to diversify by including some growth and venture investments, which target newer companies, which may grow more rapidly.
By drawing on our extensive network and experience, we believe our co-investment strategies offer an attractive, opportunistic add-on to a diversified portfolio, alongside other private equity investments.
