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Mitigating the J-Curve with Private Equity Co-Investments

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London (HedgeNordic) – HedgeNordic had the opportunity to interview Susanne Forsingdal, Head of Americas for Allianz Capital Partners (part of Allianz Global Investors), who is based in New York City and hear her thoughts on the benefits of co-investments in the Private Equity space. Prior to joining Allianz Capital Partners, Forsingdal was part of the team that set up another highly successful Private Equity program for Denmark’s largest pension fund, ATP. This followed her career in banking including equity analysis, strategy and investor relations for Nordea, Codan Bank and Danske Bank.

Private equity has not been immune from interest rate and inflation shocks, and valuation multiples have generally come down – but in some cases growth of revenues and cashflows, advancing even faster than inflation, has been enough to keep valuations and fund NAVs fairly steady. Going forward, there are now opportunities to make additional investments in existing or new portfolio companies, at lower valuations, helping portfolios to “average down” and reduce weighted average valuations. Historically, these sorts of downturns have later turned out to be some of the more lucrative vintages in which to invest, as private equity managers are creative in finding ways to build value in companies.

This does not necessarily involve buying a deep drawdown in performance, rather getting more revenues and EBITDA growth for the same sort of NAV entry level. Some Private Equity programs have proved to be resilient through both the Covid crisis and the more recent inflation and interest rate shocks.

“We are invested with some more conservative growth managers who mainly own profitable or breakeven companies, but we have an overall tilt towards buyouts…”

This partly reflects the segments that Allianz Capital Partners has allocated to. “We are not invested in venture in Europe or the US and are not in the ultra-growth segment of the market. We are invested with some more conservative growth managers who mainly own profitable or breakeven companies, but we have an overall tilt towards buyouts, evenly split between large to mega and small to mid-market buyouts,” explains Forsingdal.

The outperformance of Allianz Capital Partners’ Private Equity program predates both Covid and the rate hikes. “In the early years since we started investing in 1996, performance was closer to market averages. But over the past 15 years it has been continually improving,” she points out.

Allianz Capital Partners, as part of Allianz Global Investors, is one of the leading private equity investors with over 25 years of expertise in private markets and a strong international network to leverage. Their co-investments build on the success of the rest of the program.

“We only make co-investments with existing managers carefully picked for our program and with whom we have built up relationships of trust and respect. We have not been tempted to commit to new funds in return for co-investments,” says Forsingdal.

Allianz Capital Partners has EUR 29 billion AuM in over 100 Private Equity funds and relies on its strong relationships with Private Equity managers to access healthy co-investments. Allianz Capital Partners is invested with many “blue chip” PE managers in the US and Europe and generally selects funds running at least USD 500 million.

Their funds of Private Equity funds can allocate up to 20% to co-investments, and Allianz Capital Partners is planning a standalone strategy focused solely on co-investments.

The J Curve

The existing co-investment program is performing well. But even if investors assume neither an adverse selection bias, nor any skill in picking co-investments, there are two reasons why they may outperform. Since co-investments hit the ground running an asset is closer to a monetization event, whereas the IRR of a brand new Private Equity funds will suffer from sitting on idle capital, as it may need to wait 5 or 6 years to invest some of the capital in a new investment.

The second benefit is that most of the co-investors pay no management fees nor carry to the underlying managers (though in a few cases there can be carry above a very high return threshold).

Allianz are considering opening up their co-investment program to new clients and Forsingdal estimates that a new co-investment strategy in the pipeline could benefit from significant fee discounts, while matching the level of gross returns of the other Allianz Private Equity funds.

A Diversified Portfolio

This new co-investment strategy should be well diversified over 20 or more different managers, regions, strategies, and maturities, ranging from mid-market to late growth to mega buyouts. This results in a portfolio with a higher level of diversification than a single typical Private Equity fund.

Allianz research shows that private equity has a lower technology weighting than publicly listed US equities. In addition to the technology, media, and telecom (TMT) sector, the co-investment strategy should invest in healthcare, industrials, consumer and retail and business services. Financials are excluded because they could be too correlated with Allianz’s own business.

Other exclusions are based on an extensive ESG list which goes beyond some other ESG policies: criteria rule out clinical trials and animal testing, mining, and human rights violators, amongst others.

Deal types could focus on both operational improvements and financial engineering. They could include rationalizations, buy and builds, carve outs, mergers of equals and take privates. Deal sizes could range from below $250 million to above $1 billion but will tend to be on the larger side because Private Equity managers need more capital from co-investments to fund larger deals.

Case studies include a home products group, a residential services group and a software company acquired by one Private Equity company and sold to another one for multiples of between 2 and 4 times and IRRs above 30%. Another deal involved an information provider acquired by a Private Equity group and later sold to a credit ratings agency, generating a comparable return.

Monitoring and ESG

Allianz Capital Partners receives financial and ESG KPI reporting on investments between 2 and 4 times per year and has never exited a co-investment before the underlying manager wanted to do so. Allianz Capital Partners defines ESG conditions and KPIs at the time of the investment. “If Allianz Capital Partners’ ESG policy evolves in different directions to that of the managers over 10 years, that is not necessarily a reason to divest as it is reasonable for GPs to expect Allianz Capital Partners to stay aligned with the fund through the life of the co-investment, though hypothetically Allianz Capital Partners might then seek to sell an investment back to the manager or another third party,” says Forsingdal.

Target Investor Base

In contrast to the underlying managers, Allianz Capital Partners do not insist on any previous relationship as a condition for participation in the new co-investment strategy.

“The target market is not the very largest pension funds such as ATP, which will generally have their own Private Equity programs, but rather smaller and medium sized pension funds, insurance companies, endowments, family offices, and possibly also Private Equity funds of funds, high net worth individuals and private banks,” says Carl Winnberg, Head of Wholesale Nordics for Allianz Global Investors, who sits in Stockholm.

“The target market is not the very largest pension funds such as ATP, which will generally have their own Private Equity programs…”

Investors in such a Private Equity co-investment strategy would need to meet the minimum ticket of USD 5 million and commit to the 10-year holding period.


Careful deal selection will be important in a climate of potentially slowing economic growth as rate rises filter through to the economy, and higher costs of leverage and inflationary cost pressures could create challenges for some companies, and may reduce exit valuation multiples for deals including leveraged buyouts (LBOs). Seasoned Private Equity managers with experience of workouts and restructurings should be well placed to weather these headwinds for any portfolio companies that do find they are overleveraged when the time comes to refinance debt. Equally, Private Equity managers have been adept at selecting secular growth stories where companies can continue growing with limited sensitivity to overall economic growth. Notwithstanding the denominator effect increasing weightings in 2022, many of the world’s largest institutional investors are maintaining or increasing their target portfolio allocations to a range of illiquid alternatives, including private equity, private debt, real estate, other real assets, and infrastructure.




Allianz Capital Partners is one of the Allianz Group’s asset managers for alternative equity investments and are part of Allianz Global Investors (AllianzGI). As a leading active asset manager with over 2700 employees including 750 investment professionals in 25 offices worldwide, we manage €647 billion in assets for individuals, families and institutions. Allianz Global Investors has an expertise across equities, interest rates, multi asset and alternatives asset classes.

AllianzGI is part of Allianz Group, which is one of the leading financial services providers worldwide. Founded in 1890, Allianz has more than 125 years of asset management expertise to its name. Back in 1998, Allianz saw the opportunity to create a unique asset management business by integrating all of its major asset management units under one roof.

For professional investors only. Private Equity investments are highly illiquid and designed for professional investors pursuing a long-term investment strategy only.

Target return assumptions may be based on the investment team’s experience with predecessor funds, market participants and other stakeholders of the industry. Actual returns from an investment in the portfolio over any given time horizon may vary significantly from the target return assumptions. To the extent we express any prognoses or expectations in this document or make any forward-looking statements, these statements may involve known and unknown risks and uncertainties. Actual results and developments may therefore differ materially from the expectations and assumptions made.

Investing involves risk. The value of an investment and the income from it may fall as well as rise and investors might not get back the full amount invested. Past performance does not predict future returns. If the currency in which the past performance is displayed differs from the currency of the country in which the investor resides, then the investor should be aware that due to the exchange rate fluctuations the performance shown may be higher or lower if converted into the investor’s local currency. The views and opinion s expressed herein, which are subject to change without notice, are those of the issuer companies at the time of publication. The data used is derived from various sources and assumed to be correct a nd reliable at the time of publication. Allianz Global Investors may terminate arrangements made for marketing, including by way of de notification. The Summary of Investor Rights is available in English at https://regulatory.allianzgi.com/en/investorsrights

For investors in the European Economic Area (EEA) & United Kingdom

This is a marketing communication issued by Allianz Global Investors GmbH, www.allianzgi. com, an investment company with limited liability, incorporated in Germany, with its registered office at Bockenheimer Landstrasse 42 44, 60323 Frankfurt/M, registered with the local court Frankfurt/M under HRB 9340, authorised by Bundesanstalt für Finanzdienstleistungsaufsicht (www.bafin.de). Allianz Global Investors GmbH has established branches in the United Kingdom, France, Italy, Spain, Luxembourg, Sweden, Belgium, and the Netherlands. Contact details and information on the local regulation are available here (www.allianzgi.com/Info).

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