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Talking point: Is co-investment a step too far?

Our LP survey suggests private debt investors are keen to avoid overconcentration in their portfolios.

It doesn’t seem far-fetched to imagine that, when it gets its new private debt strategy fully up and running, Australia’s QIC may well offer its investors a co-investment option. After all, when Andrew Jones, the firm’s newly appointed head of private debt, held the equivalent role at AMP Capital, he oversaw the $4 billion fundraise for AMP Capital Infrastructure Debt Fund IV.

34%

Proportion of LPs that struggle to move quickly enough on opportunities

Not only was it reportedly the largest ever fundraise for an infrastructure mezzanine debt strategy, it also boasted $1 billion in co-investment rights. If Jones makes co-investing a feature of QIC’s approach, it would be no surprise – but equally, in the world of private debt, it would be increasingly unusual.

According to our LP Perspectives Study 2021, fewer than one in four LPs expect to participate in co-investment opportunities over the next 12 months – a significant reduction on the equivalent figure a year earlier. Some of the shine has gone off co-investments in the credit world during covid. Today, just 23 percent of the LPs surveyed expect to participate in co-investments in private debt, compared with 71 percent who expect to do so in private equity.

“The most commonly cited inhibitors include insufficient staffing”

What explains this discrepancy? We hear from many market sources that co-investment is easier said than done, with the most commonly cited inhibitors including insufficient staffing and challenges in meeting required transaction deadlines. One in four LPs in our study say they lacked sufficient staff, while 34 percent admit they struggled to move quickly enough.

Co-investment can also lead to potentially troublesome concentration issues. Diversification is a prime motive for many investors in private debt, with exposure to potentially hundreds of loans within a given portfolio. Taking large single-company bets doesn’t necessarily sit easily with what many LPs are looking for from the asset class.

Safety first

It could also be that the challenges of remote due diligence during the pandemic have made investors less willing to take chances, or do anything outside the scope of what they would do normally.

Investors may have concluded that, if they are to continue co-investing, it would be better to trust their more longstanding relationships with private equity firms, rather than their newer ones with private debt managers. But a year from now, co-investment could just as well be back on the agenda, and the current low take-up viewed with puzzlement.