Co-investors should also obtain contractual assurance that the shareholders` agreement will not be modified in a manner that infringes the rights that are transferred to co-investors without their consent. Finally, co-investors should seek the right to require the promoter to enforce the contractual rights of the co-investment vehicle under the shareholders` agreement. What should investors consider when negotiating a co-investment? Below, we cover five key topics that often occur when trading passive co-investments – although some are also applicable to active co-investments. According to a study by Prequin, 80% of LPs reported better performance of equity co-investments compared to traditional fund structures. In a typical co-investment fund, the investor pays a fund sponsor or general partner (GP) with whom the investor has a clearly defined private equity partnership. The partnership agreement describes how the PM allocates capital and diversifies assets. Co-investments avoid typical limited partnerships (LPs) and general funds (PGs) by investing directly in a company. It`s not hard to see why: Investors rely on co-investments to selectively expand their exposure to private equity and increase their net returns, as co-investors typically reduce or don`t pay or bear management fees. Promoters, in turn, use co-investments to attract investors to their funds, establish or expand relationships with potential or existing limited partners, and facilitate acquisitions that would otherwise violate a fund`s diversification limits. Equity co-investments involve risks for both the private equity firm and institutional investors. Talk to a member of our private equity and venture capital team for help or questions about reviewing co-investment agreements.
Co-investment vehicles are often structured with documents similar to those of the main private equity fund. The co-investment vehicle by which a co-investment is made and the agreements underlying the vehicle are important and should not be overlooked. The specific nature of the co-investment relationship and the interaction with the lead risk capital fund should be taken into account, inter alia, as regards: the allocation of expenses and the payment of fees; share opportunities; vote; and management responsibilities. For co-investors, the co-investment transaction can be the commitment to more information and access to due diligenceDue diligence Questionable diligence is a process of reviewing, investigating or reviewing a company or a potential investment opportunity to confirm all relevant facts and financial information and to verify everything that has been raised in a merger and acquisition transaction or process. investment. Due diligence is done prior to the conclusion of a transaction. or materials they would not otherwise have. It can help the co-investor make better decisions and tailor their wider portfolio to their investment needs. A co-investment in shares (or co-investment) is a minority stake Minority stake refers to a stake in a company that represents less than 50% of the total shares in terms of voting rights made by the co-investor in a company.
The investment is made in collaboration with a financial sponsor. An example of a co-investor is that of institutional investors such as an insurance company, a pension fund or a foundation. In general, there are two types of co-investments: assets and liabilities. At first glance, it appears that GPs are losing fee income and relinquishing some control over the fund through co-investments. However, PMs can avoid capital exposure restrictions or diversification requirements by offering co-investment. 2. Liquidity alignment. Co-investors typically want to be able to monetize an investment when the main fund pulls out. In the case of active co-investments, the focus on liquidity is usually based on so-called identification and registration rights. Since co-investors are not parties to the main shareholder agreement in passive co-investments, the liquidity equalization provisions are often less detailed and sometimes limited to general ”hip-tied” clauses. It is not uncommon for the first draft of these clauses to require the promoter to sell its interest in the target company at the same time and on the same terms as the promoter`s main fund. Co-investors should ensure that such provisions are not considered an obligation on the part of the co-investors, but an enforceable right against the promoter.
They should also object to the restriction that sales can only be made `generally` or `substantially` at the same time and under the same conditions as those of the primary fund. An equity co-investment is a minority stake in a company made by investors with a private equity fund manager or venture capital (VC) company. Equity co-investment allows other investors to participate in potentially highly profitable investments without paying the usual high fees of a private equity fund. Co-investors and private equity firms consider equity co-investments attractive for several reasons. Co-investment documentation generally allows the fund to transfer all or part of its shares in the target company to an ”affiliate” without being able to claim the liquidity rights of the co-investors. The term ”affiliate” is generally defined by reference to control, which means that the affiliate`s transfer right theoretically allows a sponsor to form another vehicle controlled by it, add additional co-investors to that vehicle, and transfer a portion of the main fund`s shares into the target company to the new vehicle. Whether intentional or not, membership transfer terms thus create a backdoor of potential syndication that co-investors should close. Passive co-investments present a number of unique challenges: co-investors are at least one level away from the information, governance and liquidity rights of the main shareholders` agreement. For each type of co-investment, co-investors should seek the widest possible alignment with the primary fund, including a pro-rata sharing of transaction costs and clearing obligations for insurance relating to the target entity and the requirement that sales be made under the same economic and non-economic conditions. If the primary fund has the choice of counterparty, co-investors should have the same choice. Co-investors can also defend themselves against non-compete obligations, non-poaching or other restrictive covenants related to a sale. Finally, co-investors should consider the extent to which they wish to maintain liquidity alignment after an IPO.
Although this point is often addressed in active co-investing, it rarely receives the attention it deserves in the context of passive co-investing. Overall, a co-investment is an investment in a specific transaction made by limited partners (LPs) of a major private equity (PE) fund alongside, but not through, such a lead private equity fund. This is often achieved through a co-investment vehicle structured separately and governed by a separate set of agreements. Co-investments are attractive to private equity funds and LPs for a variety of reasons, including: a way for private equity funds to access additional capital; a means by which private equity funds can make larger individual investments that are otherwise unavailable or undesirable; and a way for SQs to achieve, among other things, greater diversification and a greater share of desirable investments. A private equity firm that might want to attract institutional investors might reduce fees or not offer fees. Over the years, the number of institutional investors interested in co-investment opportunities has increased. For many Canadian issuers, voluntary disclosure of environmental, social and governance (ESG) factors has so far been a bit of a mystery, as there is no clear consensus on the form and content such disclosure should take. A share co-investment (or co-investment) is a minority stake taken directly in an operating company with a financial sponsor or other private equity investor in connection with a leveraged buyout, recapitalization or growth capital transaction. In certain circumstances, venture capital firms may also seek co-investors.
Private equity firms are looking for co-investors for several reasons. More importantly, co-investments allow a manager to make larger investments without spending too much fund capital on a single transaction (i.e. engagement issues) or share the agreement with competing private equity firms. Co-investors bring a friendly source of capital. The co-investment vehicle is carried out through a set of separately structured agreements. In order for the institutional investor to participate in co-investment opportunities, he submits an agreement or letter of interest to the private equity firm. The private equity firm will then decide to offer co-investment opportunities, although it is not obliged to do so. .