Listed private equity trust managers are turning to co-investing to boost returns as relying on third-party funds loses favour, a move that should boost returns for retail investors, as it cuts overall costs.
Co-investing is the practice of investing directly in a company, alongside a private equity fund, as opposed to investing in a fund of funds or via a trust’s own investment manager. This approach is gaining popularity within the listed private equity trust sector, with some managers making significant changes to their investment approach in recent years. Funds of funds exist to pool private equity investments across different funds, offering diversification and access to unlisted options that trusts may not have direct access to.
The shift away from this model has seen Patria Private Equity Trust (PPET) increase its allocation to co-investing from 5 per cent in 2020 to 22 per cent in 2025. CT Private Equity Trust (CTPE) now invests 44 per cent of its portfolio in co-investments, from 20.9 per cent in 2015.
Kamal Warraich, head of fund selection at Canaccord Genuity Wealth, said that co-investing has become a more appealing prospect for managers as equity markets have matured and IPO volumes have dropped.
However, he warned that it is a more high-risk approach, and requires more time and resource allocation from trust managers.
While there is a general shift across the sector, allocation approaches can vary significantly between different fund managers. NB Private Equity (NBPE) has made the strongest commitment to co-investing with 97 per cent of its net asset value currently allocated, while HgCapital (HGT) trails the pack, with only 9 per cent allocated to co-investing.
Targets for co-investing also vary markedly, according to Stifel analysis.
Again, NB Private Equity is leading the way with a target of 100 per cent allocation to co-investing. Similarly, Pantheon International (PIN) has set no upper limit on the proportion of its funds that it can dedicate in this way.
Other trusts are taking a more cautious approach. HgCapital, for example, has set a 10 to 15 per cent target, while Harbourvest Global Private Equity (HVPE) is targeting a 20 per cent allocation, which it has already met.
Co-investing has several advantages for retail investors. Firstly, it can lower costs. By eliminating the fees incurred when investing in a fund, there are no longer two layers of fees payable on the investment, Stifel analysts note. This shift also typically means a reduction in performance fees payable by investors.
As such, returns should be higher, with some trusts stating that they will hand this uplift to investors. For example, in its latest annual report, the HgCapital Trust board said that increasing its co-investing allocation would improve the trust’s returns and allow it “to reduce the overall fee load for shareholders”.
Simplifying the investment structure increases transparency in a sector that can seem opaque to outsiders.
Investing in a fund of funds creates a multi-layered structure that can obscure the underlying assets held by the trust. Co-investing removes this problem and gives investors the opportunity to carry out their own due diligence on the companies in portfolios.
It also grants access to earlier deals in the private equity cycle.
Warraich said: “It can give access to deal placements in the growth equity space, which is in the middle part of the private equity cycle. So you can get some very interesting earlier-stage investments within the co-investing set-up.”
As a consequence of direct investing, individual companies now tend to make up a bigger percentage of trusts’ net asset value (NAV) than they would if the trust invested primarily in funds of funds.
This is both positive and negative for investors, Stifel analysts argued. “In the scenario of a realisation of a company, which is a material percentage of NAV, the gain over prior valuation may have a meaningful impact on the NAV,” the broker said.
However, it does introduce a concentration risk. If the company was to underperform or fail, this will have a tangible effect on the trust’s performance.
Added to this, while the company holding might constitute a large part of the trust’s portfolio, there is not necessarily a guarantee that the trust itself will be a significant investor in the company.
This can limit the control the portfolio managers have over the company and their ability to influence its performance.