From time to time, we are presented with opportunities. Some fall under the category of “I know this business, this value, these people and I know why the rest of the world is likely to be betting this wrong” and it falls into a bucket of self-proclaimed certainty that this position should be sized..LARGE. Sometimes that works out., but obviously not always.

From time to time, we are presented with more bespoke opportunities – a PE firm or large shareholder wants out, a take private process, an active process – that can suggest a more thoughtful structure for money. It might be a fund that is focused on these less liquid opportunities or an SPV.

Either way, here is my point and sort of the point behind Mr. Verdad’s piece. In practice, it is not easy for Mr. Expert here to make the right call consistently. I have found that over 30 years working with some of the smartest people around with money to invest, that the hit rate of said third parties to “pick” from my picks is worse.

I know “we don’t do funds, show us the idea” is popular with the Hampton’s crowd.

But our argument of “give me the money and let me make the decisions” remains a good one.

Concentrated Co-Investments

Why optimism about co-investing is excessive

By: Brian Chingono and Daniel Rasmussen

The hottest topic in the private equity allocator community these days is co-investment. Co-investments promise everything LPs want from private equity in one package: lower fees, more control, more visibility into the underlying deal, and—most importantly—the prospect of higher returns. Why pay 2-and-20 for a blind-pool fund when you can invest alongside your best GPs, often with little or no management fee and reduced or zero carry, and put more capital behind the deals you like best?

But there is a problem with the standard co-investment pitch. The usual argument focuses almost entirely on fee savings while ignoring the loss of diversification. A co-investment is not a lower-fee version of a diversified private equity fund. It is a concentrated bet on a handful of companies drawn from that fund.

The question, then, is whether the fee savings from co-investment are large enough to overcome the performance penalty from concentration. Our answer is: probably not.

Read the full article here.