How to Co-Invest Better, According to BlackRock

Limited partners still have work to do when it comes to co-investing, according to BlackRock’s alternatives investment chief.

Jim Barry is chief investment officer at BlackRock Alternatives Investors, which co-invests alongside asset owners in private equity and other alternatives funds. He spoke with Institutional Investor on Tuesday about how asset owners work alongside managers, as well as where he’s seeing investment opportunities moving forward.  

Since Barry joined BlackRock in 2011, investors have been interested in co-investing. But in recent years, their desire to incorporate the allocation style has grown, Barry said.

“There are two big advantages for an institution doing a co-investment,” he told II. “They can get some additional capital invested at lower or no fees. It has that economic benefit.”

But the bigger advantage, Barry said, is that co-investments offer more customization, so that institutions “can shape their portfolio in a way that more suits their specific needs.” 

For instance, a European institution investing in an infrastructure fund that’s denominated in dollars could consider setting up a co-investment that could be denominated in euros.  

For all this interest, though, Barry said “very few” institutions are poised to be really effective at co-investing.  

“It’s not just you need to hire someone or some people to do the work,” he said. “You also need to put in an investment process that enables you to actually do it. That’s where a lot of institutions are weak.” 

According to Barry, one of the things institutions often miss when they hire staff to begin a co-investment program is setting up an investment policy that lays out how they should manage those deals. He said that the organizations doing this successfully tend to be larger funds, with significant resources — think the Teacher Retirement System of Texas’s emerging manager program.

“I think over time we’ll begin to help more institutions do this in a way they haven’t heretofore,” Barry said. “If you’re in GP land, then you need to be offering this as an option.” 

Regardless of whether an asset owner is co-investing, they will likely find that today’s alternative investment market is a tough one to deploy capital in, Barry said.  

“There’s a huge premium on deal sourcing right now,” he said. “As a driver of alpha, it’s a much greater contributor than it ever has been before.” 

This is particularly the case in renewable energy assets, according to Barry. He noted that deals in that sector abound, but sniffing out the ones that are appropriately valued is a difficult task.  

Barry has numerous investment theses he’s pursuing, as his post covers nearly every alternative asset class. 

Among them is structured or opportunistic credit, he said. While returns have come down like in other asset classes, “private credit is still attractive,” Barry said. “One area I particularly like is infrastructure debt. It has shown robustness.” 

Within infrastructure debt, Barry noted that there’s an illiquidity premium that has been sustained over time. And that’s likely to continue.  

“We never had a big pandemic fallout,” he said. “As that begins to unwind next year, I think we’ll see more scar tissue become evident.”