Hermes head of institutional Mark Miller, adds: “The benefit of a segregated account is you are investing yourself as a pension fund and you pay lower fees, so the net return should be higher because you are reducing the fee drag. It is a cost-effective way to get exposure and it minimises the J-curve because you are investing in assets and owning them quickly. The benefit for the GP is they get to buy slightly bigger assets.”
Indeed, it is often larger investors who tend to have a big enough ticket size and internal resources to be able to carry out the necessary due diligence and ongoing monitoring of these structures.
The Preqin survey showed 67% of investors with more than $10bn under management would consider investing or already do co-invest in infrastructure, whereas only 32% with fewer than $1bn under management would invest this way. For real estate this stood at 60% and 24% respectively.
But investors of all sizes also need to be comfortable with the increased governance and ongoing involvement attached to these deals. In fact, falling short in this area could significantly affect investment returns.
Doug Doughty, client portfolio manager in JP Morgan Asset Management’s Global Real Assets business, warns being insufficiently staffed can actually hurt an underlying investment, especially if the investor is unresponsive to the manager and does not help make investment decisions along the way.
“If you slow the pace down you could harm your investment because you have impeded in that operation,” he adds.
Similarly, a co-investor often has to adapt to the investment timetable of the GP and failure to do so can mean deals fall away. Elsewhere, investors risk delegating away their voting rights to the manager meaning they do not have the same rights as if they were a pure equity investor.
Another consideration is scale, as often these deals require a big ticket investment, particularly if the GP cannot participate in the entire transaction alone. If, for example, the GP is putting 50% into a transaction then an investor would need to put in the remaining half of what is often a considerable sum of money.
Scale is a concern for West Midlands Pension Fund assistant director of investments Mark Chaloner, who says: “With co-investments you can deploy a fairly large amount of capital, larger than you would normally do, into a single or a small number of investments which in aggregate amount to a large sum. If they don’t work out then the performance implications could be quite significant, so you have to be mindful of concentration risk and having a suitable investment selection and monitoring process.”
Finally, investors have to question why the co- investment opportunity is coming up in the first place. It could either be because the fund does not have enough capital or there are restrictions on the largest size of transaction a fund can do. Either way, if it is such a great investment then why is the manager not doing it all themselves?
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