Private equity trusts like Pantheon International and Patria PE have undergone a significant shakeup in investment structure over the last decade, which analysts say is set to cut fees and boost returns.
“There has been a major shift in the composition of many of the listed private equity companies portfolios in recent years,” explained Stifel analyst Iain Scouller in a research note.
Traditionally, private equity trusts have been run through investing in either third-party funds, or funds run by the manager of the trusts.
Now, more and more are switching to a co-investment model, where the trust directly invests in a private company alongside other investors, cutting out the middle man.
“A good example is Pantheon International, which in 2013 had a portfolio 100 per cent invested in funds – the funds exposure has now fallen to 45 per cent, whilst the co-investment and other direct investment exposure is 55 per cent,” noted Scouller.
“Some of the managers segregate out the performance data on their co-investments, which we think gives investors some good insight,” he added, such as Harbourvest Global PE, which has 20 per cent of its assets in direct co-investments.
In its interim results last year, the trust revealed that this part of the portfolio had been the strongest performing segment, growing by 5.3 per cent compared to a 1.2 per cent gain in its primary funds investments and a 3.2 per cent gain in its secondary fund investments.
Other trusts with a significant share of co-investments include Columbia Threadneedle Private Equity (44 per cent) and ICG Enterprice (55 per cent).
Meanwhile, others have been slowly welcoming the model into their structures. Patria PE is holding a shareholder vote today to increase the percentage in co-investments to 20-35 per cent of its portfolio from the current limit of 25 per cent.
Hg Capital said nine per cent of the portfolio was in co-investments at the end of last year, compared with six per cent at the end of 2023, and the board is aiming to increase this to between 10 and 15 per cent of its portfolio.
Benefits of private equity shakeup
The shift has a number of positive implications for investors, such as only one one layer of fees and no performance fees on co-investments leading to lower costs.
In addition, the shift has resulted in better balance sheet management, as traditional third-party fund investment will see a trust make a financial commitment to invest, with the cash taken slowly over a number of years.
Now, managers can decide to make a co-investment when they have spare cash available, with no further obligations to invest.
“A portfolio which is now wholly co-investments is NB Private Equity and we view one benefit being that NB Private Equity has no material unfunded commitments and no material leverage on its balance sheet,” noted Scouller.
The trust can also make more substantial investments, as they aren’t investing in a fund that will be made up of a variety of companies, and can be more focused on specific industries.
However, Scouller warned that the shift to the co-investment model did come with some downsides, such as the risk that the private equity trust may not be a sizeable investor in its companies, allowing it little or no influence over its running.
In addition, a co-investment model is more time consuming, as work around due diligence and actually making the investment is outsourced to a third-party manager.
Meanwhile, companies pursuing co-investment will have a higher concentration of risk in their portfolio.