Co-investments: Another way of investing in private equity

David Chan, Portfolio Manager – MLC Private Equity
Alicia Chen, Assistant Portfolio Manager – MLC Private Equity

We’re big fans of co-investments in private equity. We think they’re one of the best parts of this type of investing. This note explains what they are, why we like them, and how we approach them.

What are co-investments?

Private equity means investing in companies that aren’t listed on the stock market. Usually, you invest through a private equity fund. You commit money upfront, and the private equity fund manager (called a General Partner or GP) uses it to buy and improve any number of companies over time. You don’t know exactly which companies your investment will contribute to at the start.

Co-investments are different. A trusted investor (like a superannuation fund, or institutional investment manager, like MLC) is invited to invest directly alongside the GP into specific companies they’ve chosen. It’s a chance to put money into hand-picked business rather than a whole basket through a fund.

Why do we like co-investments?

1. Lower costs Co-investments usually have little or no management fees or carried interest (a share of profits that goes to the manager). This means more of the returns can stay with investors.
2. Potentially stronger returns Research shows that well-diversified co-investment programs (ones that spread money across many different GPs and companies) have historically delivered better results than traditional private equity funds.¹
3. Faster start to returns Traditional private equity funds often have slow early years (called the “J-curve”) because of upfront costs and time to improve companies. By contrast, co-investments typically call investor’s capital upfront allowing for quicker capital deployment to reach positive returns sooner.²
4. Focus on mid-sized companies We prefer mid-sized companies. They often have more room to grow and improve than very large ones. They tend to grow earnings faster,³ are bought at more attractive prices, and use less debt⁴ – making them potentially lower risk.

Our approach at MLC Private Equity

We’ve been investing in private equity since 1997 and doing co-investments since 2007. Key points about how we do it:

• Strong relationships – We’ve built long-term partnerships with what we regard as some of the world’s best private equity managers. Many of these top managers only work with investors they know and trust.
• Careful selection – We only partner with experienced managers who specialise in particular industries (such as healthcare, technology, or consumer businesses) and who invest their own money alongside ours (“skin in the game”).
• Diversification – We spread investments across different managers, industries, countries, and years to reduce risk.
• Thorough checks – We do deep due diligence on every opportunity and stress-test companies for tough scenarios (e.g., higher interest rates or slower economy).
• All-weather investing – We’ve stayed committed through good times and bad – the Global Financial Crisis, COVID, and recent high inflation. Managers value reliable partners like us.

A quick word on risk

Private equity and co-investments are long-term investments – your money is typically tied up for 5–10 years and can’t be easily accessed. Returns aren’t guaranteed, are more difficult to value than listed equity and values can go down as well as up. That’s why choosing skilled managers and doing thorough research is so important.

In summary, we believe co-investments offer an attractive way to access high-quality private companies with lower fees and the potential for better net returns. When done well, they truly are a jewel in the private equity crown.