For decades, investing in alternative/private assets largely followed a specific formula: asset owners allocated assets to fund managers, who then invested in various types of direct investments, typically keeping a portion of the returns. Recently, however, asset allocators – including family offices, endowments, foundations, and pensions – have shown increasing interest in including direct or co-investments within their portfolios.
According to data provided by Cambridge Associates, limited partner co-investments accounted for 25% of all private equity transactions in 2017, and capital invested in co-investments doubled to $60 billion from 2017 to 2018. With the direct investing benefits of reduced costs – avoiding cash and carry fees to general partners associated with co-mingled investments – and the potential for higher returns through investment concentration, it’s no wonder some of the country’s largest state pensions are part of this trend.
Co-investing also presents risks, however. When a portfolio has a high level of exposure to these types of holdings, the whole portfolio could be at higher risk than one that is highly diversified through funds. Direct investing also typically requires more personnel and expertise for tasks like pre-investment due diligence, post-investment monitoring and management, and when the time comes, executing an exit strategy.
For limited partners looking to incorporate more private equity co-investments into their strategies for 2019, some of these challenges can be overcome with industry-specific research and portfolio management solutions. Dynamo Software, an end-to-end investing platform for asset allocators, offers powerful multi-asset class portfolio monitoring, data automation, and analysis tools. Additionally, Dynamo’s data services division can alleviate the burden of both structured and unstructured data entry and enrichment.
Powerful Research Management
Participating in co-investments often requires LPs to conduct extensive due diligence into the target holdings, the industry sector they are in, and the competitive landscape – a job that has historically been done by fund managers. With Dynamo, allocators can leverage pre-built connections with third-party data providers to easily collect and automatically tag research to relevant entities. Investors can then quickly access their teams’ investment and fund manager research from Dynamo’s organized, searchable, and smart device-ready platform.
Support for Complex Ownership Structures
Dynamo enables you to view investment data from the top-level organization down to the portfolio funds and their underlying holdings. Limited partners whose strategies include co-investments can view total exposure to a sector, region, or holding. With Dynamo’s data collection and normalization service HoldingsInsight, allocators can drill down further to see the direct or co-investing vehicles which comprise that exposure.
Such transparency into an LP’s exposures empowers organizations to spend less time managing data and more time doing what they do best: making investment decisions.
In collaboration with limited partner clients, Dynamo has created an extensive library of reports to help allocators better understand investment returns, ownership hierarchies, portfolio exposures, cash flow forecasts, and liquidity.
Portfolio Monitoring and Fund Valuations
Dynamo’s 2019 acquisition of Preqin Solutions, a subsidiary of Preqin Limited, further streamlines the compilation and modeling of portfolio company financials and performance data. With Preqin Solutions, portfolio companies can directly report financial statements that can then be normalized into one, uniform format. This way, LPs can have direct insight into their direct investments’ performance, and can easily calculate valuations and cash flow forecasts, and plan effective exit strategies.
Once these tasks are automated and simplified, limited partners are able to spend more time gleaning insights from their data and sourcing more deals. With a scalable platform supporting their investment processes, asset allocators with teams of all sizes can feel secure in participating in direct and co-investments alongside their fund holdings.
If you are looking for solutions to help you manage your co-investment and fund research, please contact a Dynamo sales representative today.