Everyone is talking about co-investment at the moment says Anne Keppler who is vice president corporates and funds, Africa, equity and mezzanine: DEG, an organisation that finances companies investing in developing countries and emerging markets. Everyone in the financial and private equity space that is. Co-investing is when an investor invests alongside other private equity specialists.
Speaking at the SAVCA 2016 Conference, Keppler said they are not only seeing an increase in the number of exits from one private equity fund to the other but are also seeing more private equity funds teaming up and doing deals.
One of the more recent co-investment deals in SA, according to BDLive, saw Sabvest, an investment company headed by investor Christopher Seabrooke, co-invested with local investors Shalamuka Capital and RMB Corvest in Sunspray Food Ingredients, manufacturers of nutritional powder foods.
Mirroring international trends, an increasing number of people are looking to tap into the attractive returns that private equity offers. Recent research shows that African and South African private equity has consistently outperformed public equity over a period of time and remains the best performing asset class for many pension funds.
Eighty percent of the investors surveyed in The Search for Returns survey, expect African private equity to outperform African listed equity over the coming decade.
According to the latest RisCura-SAVCA South African Private Equity Performance Report, the South African private equity industry, by mid-year 2015, had delivered a ten-year internal rate of return (IRR) of 21.7%, up from 20.5% in March 2015. This while the FTSE/JSE All Share Total Return Index (ALSI) delivered 17.1% return over the equivalent ten-year period.
Keppler says one of the drivers behind the co-investment trend is that it is seen as a more passive way to deploy capital and deflate fees.
For private equity funds that are considering co-investing, Keppler cautions the key is to analyse the motives behind an investment and ensure that you know what you are getting yourself into.
“Everyone is asking for it but it is [important to be] careful and to analyse what you actually want and what your challenges and positives might be in that scenario,” she says.
You may be asking – what’s in it for startups? For starters, with co-investment instead of benefiting from the skills and resources that just one investor brings onboard (think mentorship, social, human and financial capital), a startup is able to benefit from two sets of investors.
Co-investments, then, allows startups access to extended sets of these types of capital brought by each investor within the partnership.
The pros and cons
Keppler outlines the pros and cons of co-investments. Co-investment deals are fast becoming popular, she says, because they offer investors cost advantages and the potential for higher returns as well as adding further value to the investment deal, but there are drawbacks that co-investors should be wary of.
“On the positive side certainly is that you complement each other and that you add value by adding an extra pair of eyes, that you can add skills or supplement skills the other party may not have.”
The downsides, however, says Keppler are that co-investing adds a level of complexity and expectations between the partners and managing these relationships can be a serious downside for co-investing.
This can mean that conflicting ideas and strategies can get in the way of the deal, and says Keppler, you don’t want to be a fighting couple in front of your clients.
“While you get to know your fund manager from a limited partner (LP) perspective much better and directly co-investing, it also adds complexity and you also need to manage this relationship throughout the portfolio phase until exit.”