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Private Equity: Co-Investments

November, 2021 | Sean Montesi & Kojo McLennon

In our last piece, we discussed how private equity has produced returns in excess of public equities. Those results, coupled with other attractive features such as tax efficiency, a broad and expanding market opportunity, and diversification benefits have led to private equity being a growing component of many portfolios. We also discussed that we believe 2-4% outperformance versus public markets to be a reasonable expectation going forward for our private equity program. If that is the goal, how should an investor be positioned?

Our conviction lies in a portfolio equally proportioned to i) buyouts and ii) venture capital (“VC”) & growth equity (“growth”), with supplemental exposure to both through iii) co-investments (“co-invests”). In our next piece, we will further detail our approach and experience in the core of our program – buyout and VC & growth fund commitments. In this piece we discuss co-invests, a growing feature in our program and the industry broadly.

What is a Co-Investment?

Co-investing is the practice of a limited partner (“LP”) investing directly into a business alongside a general partner (“GP”). In deals where their committed funds alone are insufficient for a variety of reasons (e.g., fund concentration limits, gaps in fundraise timing, etc.), co-invests allow GPs to maintain greater influence over the investee businesses, versus seeking entirely independent capital sources. GPs value LPs that can act quickly and with a degree of scale – both strengths of Gerber Taylor (“GT”) – and in exchange they generally offer more favorable economics than their primary fund terms.

In addition to lower fees, co-investing has a number of other benefits, including:

  • the ability to upsize exposure to attractive opportunities, sometimes businesses where GT has significant familiarity or related knowledge;
  • eliminating blind pool risk by investing in a single, specified company;
  • j-curve mitigation through immediate capital deployment, and little or no management fees; and
  • deepening relationships with existing GPs or establishing new ones in a more incremental way relative to a fund commitment.

Co-Investment Efficacy

What does historical experience suggest about the effectiveness of co-investing? A 2018 academic study titled “Adverse Selection and the Performance of Private Equity Co-Investments” analyzed over one thousand co-investments from hundreds of funds from 1981-2010. They found a 0.1x to 0.3x net multiple out-performance for buyouts and a 0.2x to 0.4x net multiple out-performance for VC co-invests relative to the funds from which they emanated, deflating prior notions of adverse selection. This is a logical finding; consider the following simple example in support:

  • whoever is selecting the co-invests is no better or worse at doing so than they are at selecting fund investments;
  • rather than paying 2% & 20%, still the standard buyout and VC fee structure, the co-investor pays 1% & 10% (sometimes it is better than this, and can be as little as 0% & 0%); and
  • the main fund returns a 3x gross (before fees), compared to a 3x gross return co-invest (before no or reduced fees).

In rough terms, the fee difference alone fully accounts for the net outperformance cited above. We believe a disciplined and experienced allocator, such as GT, can add incremental value through its selection capabilities. 

GT Co-Investment Experience

Starting in 2012 and accelerating in 2018, we have now directly co-invested $41 million in 20 separate businesses as of November 30, 2021. We are continuing the evolution of our co-investment efforts with the launch of a dedicated strategy. We are targeting investments in 10-20 businesses in total through a combination of VC/growth and buyout investments. We look to invest capital to amplify exposure to high conviction, high-return opportunities emanating from our high-quality GP relationships. We are now reviewing over 100 co-invest opportunities per year to identify three to five investments annually.


As we discussed in Part I of this series, the benefits from private equity in a portfolio are clear. Some of the best global allocators, the largest endowments and foundations, have sizeable allocations to private equity. We encourage investors to take note, while pointing out that private equity involves an abundance of choices, a wide range of potential outcomes, and long-term commitments. We believe the depth of our experience, extensive knowledge of the space, and quality of our manager relationships make us well-equipped to implement a successful private equity program.

How one chooses to construct a private equity portfolio, on the other hand, is debatable. Our confidence lies in a mix of VC & growth, buyouts and co-invests. In this piece, we have described how co-invests are additive to our private equity program. In our next piece, we will delve into our experience and approach in making buyout and VC & growth fund commitments.

November 2021
Sean Montesi & Kojo McLennon
Information contained in this presentation is based on the views and opinions as they exist as of the date this presentation was made available. Information in this presentation does not constitute advice or a recommendation or offer to sell or a solicitation to deal in any security or financial product. It is provided for information purposes only and on the understanding that the recipient has sufficient knowledge and experience to be able to understand and make its own evaluation of the proposals and services described herein, any risks associated therewith and any related legal, tax, accounting or other material considerations. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to their specific portfolio or situation, they are encouraged to consult with the professional adviser of their choosing, and recipients should not rely on this material in making any future investment decision.
We do not represent that the information contained herein is accurate or complete, and it should not be relied upon as such. Opinions expressed herein are subject to change without notice. Certain information contained herein (including any forward-looking statements and economic and market information) has been obtained from published sources and/or prepared by third parties and in certain cases has not been updated through the date hereof. While such sources are believed to be reliable, we do not assume any responsibility for the accuracy or completeness of such information. We do not undertake any obligation to update the information contained herein as of any future date. 
Any illustrative models or investments presented in this document are based on a number of assumptions and are presented only for the limited purpose of providing a sample illustration. Any sample illustration may not be reflective of any actual investment purchased, sold, or recommended for investment by us and are not intended to represent the performance of any investment made in the past or to be made in the future by any portfolio managed or advised by us. It should not be assumed that our investment recommendations in the future will accomplish its goals or will equal the illustration provided herein. 
The statements in this presentation, including statements in the present tense, may contain projections or forward-looking statements regarding future events, targets, intentions or expectations. Due to various risks and uncertainties, actual events or results may differ materially from those reflected or contemplated in such forward-looking statements. Past performance is no guarantee of future results. Investments are subject to risk, including the possible loss of principal. There is no guarantee that projected returns or risk assumptions will be realized or that an investment strategy will be successful. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this document, will be profitable, equal any corresponding indicated performance level(s), or be suitable for your portfolio.
All referenced indices or financial benchmarks are for illustrative purposes only, are unmanaged, assume reinvestment of dividends and income, and do not reflect advisory fees. 

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