After seeing big increases in lower middle market co-investments in 2020 and 2021, Cambridge Associates is now witnessing a similar surge in late-stage venture capital deals.
“We’re seeing a big spike right now in late-stage venture,” Scott Martin, head of global co-investments at Cambridge, told Institutional Investor.
Co-investments, when allocators invest in individual companies alongside a private equity firm, are gaining momentum. According to PitchBook, co-investment funds brought in a record $47.3 billion last year, even as private equity fundraising overall has been in decline. In addition to everyone seeking lower fees, allocators want more control over investments—something traditional funds don't offer by design.
“We started our co-investment practice 10 years ago and each year it’s picked up,” Martin added.
Meanwhile at NEPC, while demand for co-investments has remained relatively consistent, the Hightower-owned advisory firm’s head of private equity investments Josh Beers sees increased interest in large private technology companies thanks to artificial intelligence, though he dismissed a lot of that as headline chasing and FOMO.
“Overall demand for co-investing has largely centered on fee-free exposure and, in some cases, shorter hold periods,” Beers told II in an email. “The increased curiosity around technology names has been driven primarily by headlines and a broader fear of missing out.”
Beers added that allocators can also use co-investments to help diversify their portfolios beyond listed and private companies in tech and AI.
A Perfect Storm
Martin sees co-investments as a "perfect storm" for building long-term relationships between GPs and LPs. Long-term investors like hospitals and universities get deal flow and diligence from GPs, who in turn get patient capital from century-old institutions that may keep these direct investments for decades or more. "A hospital should want to be around forever," he says. "A 200-year-old university should want to be around for another 200 years."
Donna Snider, CIO of $6 billion Hackensack Meridian Health, says many healthcare organizations with lean staffs are building co-investment programs that fit their organizations’ needs. “We’re trying to do the same thing here,” said Snider.
GPs also use co-investments to deepen ties with existing LPs that have specialized expertise. For example, a European family office with deep industrial and operational experience can provide knowledge and networks to a GP without taking a board seat. In healthcare, hospital system LPs can offer insights on improving care delivery.
GPs who are open to co-investing with investors that are not yet clients often signal interest in those same investors for their next fund. If an investor likes a co-investment opportunity but lacks a prior relationship with that GP, they should consider committing to the GP's next fund.
