Co-investment deals could be the next PE bubble LPs fear

Speaking during a conference call, Hirsch said that while 2014 had been a strong year for private equity fundraising globally - with about $486 billion raised, according to Preqin - it still fell short of record numbers seen in the years preceding the global financial crisis.

However, he also noted that the asset class had matured and the overall picture had become more complicated, with a lot more fundraising data going under the radar.

"We call this shadow fundraising," explained Hirsch, "LPs are now attacking private equity in more than just the traditional ways of going into a fund."

Much of this overlooked capital comes from three main areas: separate accounts, where GPs seek to offer tailor-made funds to its largest investors; secondaries, where LPs are directly transacting secondary deals without using a fund-of-funds; and co-investments. The last of these has been driven by a desire among LPs to access the asset class cheaply and in a more targeted way. The problem is that the reality has not always met expectations.

"There is a perception among LPs that co-investing is easy, everybody wants to do it and everyone is trying to do it," said Hirsch. "But co-investing does require a real skill set and I think too many LPs do not have the requisite skillset, or have the resources and the staff to be evaluating transactions."

In addition, Hirsch said he feared that too many GPs offering co-investment were really only doing so as a fundraising exercise to "curry favor" with LPs as opposed to actually needing co-investment capital.

"Over a period of time there has been very consistent underperformance of co-investment - either LPs are adversely selecting co-investments, or GPs are adversely selecting the deals they are showing to their LPs," said Hirsch. "Either way the combination has not been a terrific picture for what is happening in this part of the market place - we look to this as one of the bubbles being formed on the horizon."

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• Topics
• Fund-of-funds
• LPs
• Fundraising
• LPs
• Fundraising
• Hamilton Lane