A more challenging private equity fundraising environment is creating opportunities for co-investors, as managers increasingly turn to investors to help finance individual deals. For Evli, which has long pursued co-investments and runs a dedicated Private Equity Co-investment Fund, the strategy offers lower fees, greater control over company and sector exposure, and more flexibility in deploying capital.

“The fundraising environment has been much tougher. It takes longer for managers to raise funds and reach their target sizes, and many are still falling short,” says Ilja Ripatti, Investment Director of Co-investments at Evli. As a result, private equity managers increasingly turn to co-investors to help finance individual deals. “For co-investors, the current environment has actually been quite good.”

Lower fees and greater control over capital

One of the main attractions of co-investing is the potential to reduce the fees associated with private equity. “The most widely known advantage is the cost savings, because you typically pay no management fees or carried interest, or perhaps just a one-off transaction fee,” Ripatti says.

“The most widely known advantage is the cost savings, because you typically pay no management fees or carried interest, or perhaps just a one-off transaction fee.”

Ilja Ripatti, Investment Director of Co-investments at Evli.

The difference can be meaningful over the life of an investment. Ripatti estimates that the historical gap between gross and net private equity returns has been around 500-600 basis points, reflecting the effect of management fees and carried interest. Co-investments can bring investors closer to the gross returns generated by the underlying businesses, although the actual savings depend on investment performance and the fee arrangements. “You’re much closer to the gross return than to the typical net return after fund fees,” confirms Richard Wanamo, Investment Director and Co-Head of Private Assets at Evli.

Beyond fees, co-investments give investors greater control over portfolio construction. Rather than accepting the company and sector exposures selected by a private equity fund manager, they can choose individual deals that align with their investment priorities. “You have more discretion over asset selection, so you can choose the companies and sectors where you want greater exposure,” argues Ripatti.

“You have more discretion over asset selection, so you can choose the companies and sectors where you want greater exposure.”

Ilja Ripatti, Investment Director of Co-investments at Evli.

Co-investments also give investors greater control over capital deployment. As capital is typically invested when a transaction closes, less remains tied up in unfunded commitments. “You have fewer unfunded commitments, so the capital is put to work pretty much when you do the deal,” Ripatti says.

A closer look at private equity managers

For Evli, which also manages a fund of private equity funds, co-investments provide a way to assess general partners beyond their track records and fund-level performance. By examining individual transactions, the firm gains insight into how managers assess risk, value businesses and develop plans for value creation.

“When selecting GPs, having assessed co-investment opportunities alongside them gives us a much deeper understanding of how they approach deals,” says Wanamo. “It helps us see whether their investment decisions match their stated philosophy, how they assess risk, and how thoroughly they analyze each opportunity.”

“When selecting GPs, having assessed co-investment opportunities alongside them gives us a much deeper understanding of how they approach deals.”

Richard Wanamo, Investment Director and Co-Head of Private Assets at Evli.

Ripatti also sees co-investments as a way to build relationships with managers while examining the assumptions behind individual deals. “Co-investments are a great way to get to know a manager better and build the relationship,” he elaborates. “You get to look under the hood and see how they assess a deal, what assumptions they make, and how they plan to create value.”

Selecting companies and managing risk

Co-investments provide greater control over individual investments, but that selectivity also places greater responsibility on investors to assess each opportunity. Evli’s approach focuses on profitable, growing businesses that generate cash flow and offer several ways to create value. “Our investment strategy focuses on profitable, growing companies that generate cash flow,” notes Ripatti. “We look for businesses where there are multiple ways to create value, with different levers we can pull.”

Evli’s assessment places particular emphasis on downside protection. The team looks for businesses that can withstand weaker economic conditions, rather than those whose investment case relies heavily on favourable markets or expanding valuation multiples. “It’s much easier to avoid lemons than to find the next 10x opportunity,” considers Ripatti. “We focus more on the downside and what can go wrong.”

“It’s much easier to avoid lemons than to find the next 10x opportunity. We focus more on the downside and what can go wrong.”

Ilja Ripatti, Investment Director of Co-investments at Evli.

Evli has also reviewed data suggesting that co-investments have historically had lower loss rates than private equity funds overall. Ripatti points to the significance of these deals for the managers involved as one possible explanation. “Co-investments are typically among the largest positions in a manager’s portfolio. They might account for 8 or 10 percent of the fund offering the deal, so they tend to be high-conviction investments for the manager,” argues Ripatti.

Diversification is another pillar of Evli’s risk management approach. “We always aim to build diversified portfolios and avoid becoming too heavily exposed to sectors that are particularly popular at the time,” Wanamo says. “The holding period is long, so you don’t want to put all your eggs in one basket.”

“We always aim to build diversified portfolios and avoid becoming too heavily exposed to sectors that are particularly popular at the time. The holding period is long, so you don’t want to put all your eggs in one basket.”

Richard Wanamo, Investment Director and Co-Head of Private Assets at Evli.

Evli’s dedicated co-investment fund targets a portfolio of around 15-20 companies, primarily in North America and Europe, with opportunities in other OECD markets through selected global managers. The firm also looks beyond conventional sector classifications to identify common underlying risks. A portfolio spread across different industries may still be exposed to the same factors, such as artificial intelligence or US consumer spending. “You might be diversified across sectors but still exposed to the same underlying factors,” observes Ripatti. “We don’t want to fool ourselves into thinking we’re diversified when our investments are effectively exposed to the same thing.”

An additional source of returns in a changing market

Careful company selection has become increasingly important as private equity faces a more challenging environment. Distributions have slowed, financing costs have risen and managers have less scope to rely on rising valuations to generate returns. Wanamo argues that success increasingly depends on the quality of individual general partners and their ability to improve the businesses they acquire. “In this environment, you can’t rely on multiple expansion driven by a rising market. General partners really have to roll up their sleeves,” argues Wanamo. “The ones that succeed will be those with the strongest teams and the right tools to create value in the companies they acquire.”

“In this environment, you can’t rely on multiple expansion driven by a rising market. The ones that succeed will be those with the strongest teams and the right tools to create value in the companies they acquire.”

Richard Wanamo, Investment Director and Co-Head of Private Assets at Evli.

Operational improvements can include strengthening a company’s business model, reducing customer or supplier concentration and making its operations more resilient. Ripatti also sees potential for artificial intelligence to improve margins in companies where the technology can be applied effectively. “You can’t count on multiples expanding, but fund managers can create their own luck by improving the businesses they invest in,” Ripatti says. “The aim is to make companies stronger and more resilient, and reduce their risks.”

Wanamo expects co-investments to remain an increasingly established part of private equity. For limited partners, they can complement traditional fund commitments by offering more control over asset selection, lower fees and the potential to generate additional returns. “Most large investors are doubling down on co-investments. They’ve become an important tool for LPs to reduce fees and gain other benefits, but they’re also increasingly important for GPs,” Wanamo says.

Ripatti describes the approach as a core-satellite structure, with traditional fund commitments providing core private equity exposure and co-investments offering opportunities to generate additional returns through selected deals. “For many institutional investors, co-investments are a way to reduce fees while also generating alpha,” he says. “Fund investments provide the core private equity exposure, while co-investments offer the opportunity to add alpha.”