David Breach, Vista Equity Partners

As some of the world’s biggest pension funds ramp up their co-investing programmes, large asset owners are increasingly building the skills and resources to take advantage of this model of investing.

But experts warn co-investing is resources-intensive, and requires a level of alignment between general partner (GP) and limited partner (LP) that goes far beyond other investments. Funds need to do solid groundwork to take advantage of the benefits it offers, they say.

Speaking ahead of Conexus Financial’s Fiduciary Investors Symposium from June 20-22 in the Blue Mountains, David Breach, president and chief operating officer at Vista Equity Partners, said successful co-investing requires dedicated resources and expertise. Alignment between LP and GP is critical, both at the time of deal and as long-term investors over time.

“Getting the engine running smoothly internally requires drawing from and connecting resources across the organisation – such as deal teams, investor relations, finance, legal, compliance, reporting, and others – and establishing processes and best practices internally to harmonise all of that takes time and intention.”

Vista invests in enterprise software and has $93 billion in assets under management with a portfolio of over 80 software companies. Vista began co-investing in 2014, focusing on large deals that required significant capital from partners to be able to execute. Vista ramped up its co-investment resourcing and deal activity in the past two years after setting it as a strategic priority, creating a dedicated co-investing team for software deals.

Last year Vista deployed more than $4 billion of co-investments and direct investments across more than 20 deals with LPs.

“Given the opportunity we continue to see for our private software investing funds over the next five to ten years, we are actively deploying co-investments across our entire platform, where our pipeline of deal activity can involve more than 10+ live co-investments at a time,” Breach said.

“We anticipate our ratios of fund dollars and co-invest dollars scaling to as high as 1:1 or more to capture that market opportunity and meet our partners’ growing demands for co-investment deal flow.”

Co-investing was a major topic among panelists representing some of North America’s largest funds at Conexus Financial’s Fiduciary Investors Symposium last month at the Chicago Booth School of Business.

Dan Bienvenue, the deputy chief investment officer at CalPERS–the biggest pension fund in the United States–said the fund was building the requisite skills to ramp up its co-investing programme. Co-investing allowed the fund to take advantage of its scale, Bienvenue said.

“There are a lot of organisations that can write 20 and 50 million dollar checks,” Bienvenue said. “There aren’t too many that can write 500 million dollar checks and we want to be on that short list of phone calls for situations like that.”

Samir Ben Tekaya, head of investment risk at the British Colombia Investment Management Corporation, told the conference its growing focus on co-investing gives the fund the opportunity to access markets where there are less players, and also to exert some control over the amount of leverage in the company and participate in the value creation of those deals, he said.

But co-investing is resource-intensive, he warned, requiring the fund to take an active role in sourcing deals, monitoring those deals, and attending a lot of board meetings across the portfolio. It also requires the fund to have capacity to inject cash from time to time–such as during market crises–making these investments less predictable than more passive investments, he said.

With an increasing volume of quality deal activity requiring substantial capital, Breach said co-investing gives LPs a deeper understanding of deals and the GP economics being paid. Co-investing with Vista gives LPs an “under-the-hood look” at the due diligence process, and also blends down fees for LPs.

But building solid relationships between LPs and GPs requires ongoing investments both upfront, and over time, Breach said.

“Often times, co-investments are led by a different team, which requires building new relationships within the organisation and ensuring a firm understanding of their review and approval processes for co-investments,” Breach said.

For Vista, it also involves the coordination of activities among hundreds of LPs, and ongoing reporting on these co-investments that are different to standard fund reporting.

“Building on that year after year at scale further complicates that dynamic, so having a process and best practices established is crucial to ensure smooth, accurate and timely reporting to our LPs,” Breach said.

For more on our Fiduciary Investment Symposium click here.

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