History Shows Post-Crisis Buyout Deals Outperform — And Co-investments Perform Best

Co-investments made after a financial crisis delivered higher returns even before accounting for lower fees, according to Capital Dynamics research.

Kiyoshi Ota/Bloomberg

Kiyoshi Ota/Bloomberg

Private equity buyouts have historically performed better in the periods immediately following market collapses like the dot-com bubble or the 2008 financial crisis. But the best performance belongs to co-investment deals, according to a new report from private markets firm Capital Dynamics.

In a study of 435 co-investment buyout transactions made between 1998 and 2017, the multi-manager firm found that co-investments delivered higher internal rates of returns than the overall buyout market in the three-year periods following the last major crises before the pandemic. Report authors Andrew Beaton, David Smith, and Kairat Perembetov found that the co-investment deals performed better on the median, as well as delivering higher upper- and lower-quartile returns — and that was on a gross basis, before the more favorable fees associated with co-investments were taken into account.

“Co-investments perform better than the overall market,” said Andrew Bernstein, senior managing director and head of private equity at Capital Dynamics, in a phone interview. “They outperform on a gross basis, so fees wouldn’t necessarily explain that. When we layer those on as well, we get further outperformance.”

While Bernstein said there was no one obvious explanation for why co-investment deals performed better, he said the results suggest that private equity general partners do not come to investors with co-investment offers unless they have a high level of conviction in the deal.

“There’s this mythology of adverse selection that GPs would only show deals as co-investments in situations where they had less conviction,” he said. “That really just doesn’t make any sense. The people they’re showing the co-investments to are their investors, their best customers.”


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Instead, he said the GPs are more likely motivated to structure a deal as a co-investment because it’s a large deal that requires more capital — or even simply because co-investments are part of the GP’s business model.

Most recently, he said, the more challenging fundraising environment created by pandemic shutting down travel and in-person meetings has led private equity sponsors to seek out co-investments in order to keep making deals despite prolonged fundraising processes.

“We’re seeing continued strong demand for co-investments amongst LPs, and the prevalence of co-investments being offered also seems to be continuing,” Bernstein said.

In addition to co-investments outperforming in the periods immediately following downturns, Capital Dynamics also found that co-investments were more resilient during the crisis periods. This was especially true from 1998 to 2000, the years leading up to the dot-com bubble burst. During this period, co-investment transactions had a median return of 11.2 percent, versus a median loss of 12.7 percent for buyout deals overall.

Between 2005 and 2008, co-investments also outperformed, earning a median return of 14.7 percent, compared to a 9.5 percent median return of all buyout transactions. The study used consulting firm Cambridge Associates’s investment-level benchmarks to measure buyout performance.

“Portfolios of co-investments demonstrate superior risk-return characteristics than those of buyout portfolios more generally,” the authors concluded.