Equity co-investment is a strategy that more and more investors such as limited partners (LPs) and private equity funds are using to consolidate the industry. This alternative is positioned as one of the new ways to grow this market.
This joint investment is more than a collaborative effort between private equity funds and institutional investors. With this model, the synergy between industry participants translates into stimulating more ventures, investment as well as different industries and sectors.
Thus, capital co-investment as a strategy in the industry is one of the preferred ones for LPs to diversify their portfolios. According to data from the World Economic Forum (WEF), this model grew by 47% in the last nine years.
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What is joint venture?
The joint venture is a joint investment between institutional investors and private equity funds, through a general partner (GP) .
It is a vehicle that works as an option for investors interested in entering the private equity industry and who have the resources to identify the best investment opportunities.
With this type of investment, each one of those involved, also known as co-investors, increases their chances of finding projects and sectors with high potential and profitability.
In such a way that this strategy is not only a measure for institutional investors to diversify their portfolio, but also to obtain better results without this representing a high cost for them.
This dumbbell becomes a win-win agreement for each participant. On the one hand, the LPs provide the necessary capital for the funds to invest in different projects, while the GPs of the capital funds provide the research, analysis and access to the best investment opportunities.
You can also read: What is due diligence and how does it protect your investments?
Capital co-investment, who participates?
Joint investment is emerging as an option that will boost the private equity industry. Since it offers the possibility of encouraging the development of more projects. But, who participates in this strategy?
Limited partners are one of the main figures in this dumbbell. These may be partners who already participate in the private equity fund and who decide to have a direct participation. You may also be an outside institutional investor who decides to work with an investment fund to diversify your investment portfolio.
In both cases, the figure of the general partner is fundamental, since it manages the entire process and is in charge of choosing which are the most profitable proposals for both parties.
Joint venture funds, how will they impact the private equity industry?
A joint venture fund is created from the contribution of an institutional investor to a private equity firm. This investment is accompanied by a manager or General Partner. In this way, managers have more capital available to use in different transactions.
Another of the characteristics of joint venture funds is that, by working hand in hand with a GP, limited partners have more information to decide on new investment opportunities. What represents an advantage when choosing the options that best suit your interests; unlike a traditional fund in which a defined plan is maintained.
In addition, this investment does not have a majority stake, so it does not intend to take part in the company's strategy. The intention of the co-investment funds is to collaboratively capitalize a project without getting involved in the internal processes of the companies.
Key points that favor collaborative investment:
- Diversification: Co-investing offers flexibility to direct investments by strategy and factors such as location and deal size.
- Solid relationships between GP and LP: the relationship between both actors is benefited by creating bonds of trust in continuous work.
Advantages and Disadvantages of Joint Ventures in Private Equity
Capital co-investment is an alternative that allows any limited partner to access new sectors and companies without representing a high cost of having a share in a fund. Even being a collaborative investment generates knowledge in the industry and best practices when investing.
For these investors, it represents an opportunity, since the time curve to obtain the results of an investment in private capital is reduced. On the one hand, the GP maintains the analysis and due diligence of profitable projects and sectors while the LP acquires experience and knowledge of the industry.
The relationship between the participants in a joint venture fund is shaping up to be a winning strategy for each party involved. According to the Corporate Finance Institute (CFI), these are the advantages and disadvantages:
- Lower management cost: this is one of the main attractions of this investment model. General partners reduce or cancel management costs, making it a profitable alternative.
- Necessary capital: thelimited partners provide the necessary capital so that private equity funds can make investments that would otherwise be impossible for them. For example, when the investment exceeds the capital established for the industry, or the geographical location.
- The financing gap for funds decreases: thee injection of capital by the co-investor is an opportunity for private equity funds to expand their investments.
- Strategy with a complex process: the joint venture process is usually complex since it represents a detailed study of the clauses of the contract and the points established by each of the parties.
- Investment concentration: nit is not a rule, however, the capital invested by LPs can be allocated to a specific business model or sector.
At WORTEV CAPITAL we are focused on promoting the development of innovative Mexican ventures to generate an ecosystem that promotes key sectors for the economy such as the traditional sector and consumption. With the development of more enterprises, investment is encouraged and, in turn, the economic growth of the country.