Private equity co-investments: targeting value amid higher valuations

When executed alongside proven sponsors in opportunities aligned with their areas of expertise, private equity co-investments remain an attractive source of expected investment returns and a highly efficient way for investors to gain targeted exposure to leveraged buyouts. We review the co-investment market opportunity set today, with an emphasis on value creation in software, tech-enabled business services, and healthcare, areas poised for growth no matter what path the economy takes from here. We also note the diversifying characteristics of certain financial services, such as insurance brokers and registered investment advisers (RIAs).

Co-investments help sponsors and their investors get it done together

A co-investment represents a direct noncontrolling ownership stake in a company—made alongside a private equity firm, or sponsor—rather than an indirect one pursuant to a primary fund commitment. Co-investments surface when an acquisition target requires more capital than a sponsor is able or willing to provide from its fund alone. By inviting co-investors to make up the shortfall, the sponsor can execute larger transactions while maintaining appropriate fund sizing and diversification as well as operating control—all without needing capital from another private equity firm. Meanwhile, along with a generally muted J-curve effect, which accompanies faster capital deployment, the co-investor gets an opportunity to earn a higher net return than would be available through an otherwise equivalent transaction within a full-fee fund. Mutual benefits to sponsors and co-investors go beyond a given transaction: In our view, the most overlooked value of co-investing resides in the information advantage achieved by working alongside a sponsor on a live transaction and the resulting relationship that’s strengthened by connection, trust, and collaboration.

“The most overlooked value of co-investing resides in the information advantage achieved by working alongside a sponsor on a live transaction and the resulting relationship that’s strengthened by connection, trust, and collaboration.”

Co-investment deal counts reached a new record in 2021

Limited partner co-investment deal count in global private equity

Co-investment deal counts reached a new record in 2021. Going back to 2000, this chart shows the number of limited partner private equity co-investment deals each year across the globe, a figure that reached 500, a new all-time high, by the end of the third quarter of 2021.
Source: PitchBook, September 29, 2021.

Discerning value is a crucial differentiator, especially now

While co-investing represents an attractive value proposition, not every individual opportunity is worth pursuing, especially in today’s uncertain environment. When selecting investments, it’s important to begin with two key objectives in mind: diversification and a strong fit between the sponsor’s demonstrated area of expertise and the profile of the investment opportunity. Beyond that, it’s important to consider innovative businesses demonstrating durable market positions and free cash flows, characteristics that generally combine multiple value creation levers with solid downside protection. Growth is always desirable, and it’s even more valuable when it’s scarce. Acknowledging their higher valuation multiples, an important focus remains on growing sectors likely to benefit from a convergence of enduring themes. Certain areas in tech and healthcare provide good examples.

“While co-investing represents an attractive value proposition, not every individual opportunity is worth pursuing.”

Cybersecurity demand exemplifies software’s indispensability

Some may have initially feared that the onset of the pandemic would prompt software subscription cancellations, but commerce in the COVID-19 era has only underscored the indispensability of enterprise software. Take cybersecurity, for example: The rise in remote working helped prompt more than $145 billion in global spending on cybersecurity in 2020, a year that also saw direct monetary losses from cybercrime climb to a record $945 billion.¹ Cybersecurity software firms, such as Proofpoint, which provides email, social media, and mobile device protection, and ThycoticCentrify, a specialist in identity security and privileged access (superuser) management solutions, have become essential partners to their corporate customers. High recurring business retention rates, strong cash flows, and long revenue growth runways have lured leading private equity sponsors toward cybersecurity. Transactions have already topped a combined $23 billion in 2021, including the recent $12.3 billion take-private of Proofpoint, the largest cybersecurity deal ever.²

Cyberthreats now represent a $1 trillion drag on the global economy

Estimated average cost of cybercrime (US$ billions)

Cyberthreats now represent a $1 trillion drag on the global economy. This chart shows the estimated average cost of cybercrime in recent years in U.S. dollars. Costs have grown from $300 billion in 2013 to $945 billion in 2020—a figure that exceeds $1 trillion when including the additional $145 billion spent that year on cybersecurity globally.

Source:, December 9, 2020.

Tech-enabled business services are driving the digital economy forward

As specialty software is becoming more firmly entrenched in industries of all types and companies of all sizes, so too are technology-enabled business services more broadly. The digital economy—reflecting digital goods and services, including e-commerce—now accounts for 9.6%, or $2.1 trillion, of U.S. GDP and has grown more than three times faster than the overall U.S. economy since 2005.³

The digital economy now accounts for nearly 10% of U.S. GDP

Digital economy and industry share of U.S. GDP, 2019 (%)

The digital economy now accounts for nearly 10% of U.S. GDP. This chart shows industry shares of U.S. GDP in 2019, with the digital economy trailing only real estate, government, and manufacturing.

Tech-enabled business services shaping the digital transformation have already made commerce in many fields around the world cheaper, faster, and more convenient. Investors in companies that can continue simplifying and automating complex processes for their customers stand to benefit. Others, facing a dearth of available labor, have had little choice but to find ways to automate workflows to meet demand. Private equity-backed Visma specializes in accounting, payroll, personnel, and other enterprise resource planning systems for small and medium-sized businesses and public sector organizations in northern Europe. Offering a scalable technology platform that seamlessly unifies a customer’s digital experience, Visma is driving digital transformation in functional areas as diverse as invoicing, procurement, and school administration. Visma’s entrepreneurial culture, strong position in a recession-resilient market, attractive financial profile, and proven acquisition capabilities have served its private equity investors well for over 15 years.

Biopharmaceutical consulting and cold chain shipping offer deep moats

The number of private equity healthcare deals climbed from 630 in 2019 to 694 in 2020.⁴ Private equity investors clearly appreciate that global demographics and the trend toward consumerization in healthcare services point toward attractive growth prospects for a range of health, wellness, and medical technology businesses. We see changes in industry dynamics favoring certain niche areas of opportunity around healthcare’s edges, including a pair of specialty subsegments with limited competition and high barriers to entry: biopharmaceutical consulting and cold chain shipping.

Private equity investments in healthcare businesses remain robust

U.S. healthcare services’ private equity deal activity

Private equity investments in healthcare businesses remain robust. This chart shows the growth of U.S. healthcare services’ annual private equity deal value in U.S. dollars going back to 2011. Each of the last three calendar years have hovered near $70 billion.
Source: PitchBook, June 30, 2021.

ClearView Healthcare Partners, a leading life science consulting firm, helps its biopharmaceutical clients create value through projects ranging from pipeline discovery and development to brand launch and lifecycle strategy. While several large and diversified strategy consultancies have biopharmaceutical practices, few can match ClearView’s focus and specialized expertise in this rapidly growing area. Demand for drug development and commercialization services is accelerating as costs to obtain regulatory approval continue to climb. Larger pharma companies have fewer blockbuster drugs today, which has resulted in reductions of staff and a rising need for outsourced strategists to fill the gap in an increasingly complex and fragmented market. Meanwhile, healthcare logistics company CSafe Global has been providing deep frozen storage and shipping of COVID-19 vaccines, a service that complements its cell and gene therapy supply chain management business. CSafe manufactures, leases, and services temperature-controlled containers for the transportation of high-value biopharmaceutical cargo, a market with multiple paths to value creation and attractive growth characteristics for many of the same reasons as ClearView. Both companies received additional private equity backing in 2021.

RIAs and insurance brokerages add complementary characteristics

While the economic expansion following the global financial crisis was slow, mild, and drawn out over more than a decade, the current recovery has demonstrated a sharp and steep V-shaped rebound, and it might prove relatively short-lived. Inflation (annualized core CPI has risen to 4%) poses risks of higher discount rates and lower asset valuations, which can disproportionately pressure high-growth industries.⁵

U.S. Federal Reserve is forecasting one rate hike in 2022 and three in 2023

FOMC rate projections (%)

The U.S. Federal Reserve is forecasting one rate hike in 2022 and three in 2023. This chart shows the Federal Open Market Committee (FOMC) projections of the most likely outcomes for the three-year path of the federal funds rate and its longer-run value: an increase from 0.3% in 2022 to 2.5% beyond 2024.
Source:, September 22, 2021.

Exposure to certain stable value sectors that tend to fare better in rising rate environments can provide a measure of ballast if market multiples do come down. Examples include the diversifying traits embedded in certain RIAs and insurance brokerage businesses, such as Allworth Financial and Risk Strategies Company. Allworth is a full-service independent investment and financial advisory firm that specializes in retirement planning, investment advising, tax planning and preparation, and estate planning for mass affluent retail clients. Risk Strategies is a specialty-focused brokerage that provides property, casualty, and employee benefits products and services to middle market companies in niche industries and high-net-worth individuals. Both companies have attractive financial profiles with high recurring revenue and strong cash flow and platforms for accretive acquisitions.

Be quick, but don’t hurry—questions to consider before co-investing

Participating in co-investments requires the ability to properly evaluate and commit to such transactions within a compressed window of time. Since such opportunities often surface out of a need to deploy capital promptly, prospective co-investors must evaluate several factors relatively quickly, including:

  • Ownership—Will the sponsor be a capable controlling owner of the company in question?
  • Industry—Is the company operating in a growing industry with favorable fundamentals?
  • Business—Does the company have a market leadership position and a differentiated product or service offering?
  • Management—Do executive incentives and skills align with the interests of investors and the sponsor’s value creation plan?
  • Price—Do the valuation, financing, and structure of the transaction represent a good deal with manageable risk?

While nobody knows how the current economic cycle will unfold from here, partnering with proven sponsors that get target selection, due diligence, and transaction terms right helps put the odds on the co-investor’s side. Co-investors can’t anticipate overall movements in market rates or valuations, but they can select specific sponsors and opportunities that balance potential rewards and risks, no matter what kind of macro conditions materialize next.





Note: Complete listing of portfolio exposure is 1-800 Contacts, Aftermarket Performance Group, American Bath Group, Allworth Financial, Barrette Outdoor Living, ClearView Healthcare Partners, CSafe Global, Galway Insurance Holdings, LP, Infinite Electronics, Inc., Insightsoftware, MRI Software LLC, Parts Authority, Inc., ProAmpac Holdings Inc., Proofpoint, Inc., Risk Strategies Company, Tech Data Corporation, ThycoticCentrify, Visma, as of September 30, 2021., December 9, 2020. Pitchbook, August 23, 2021. 3, June 2021. PitchBook, June 30, 2021., September 14, 2021.

A widespread health crisis such as a global pandemic could cause substantial market volatility, exchange-trading suspensions and closures, and affect portfolio performance. For example, the novel coronavirus disease (COVID-19) has resulted in significant disruptions to global business activity. The impact of a health crisis and other epidemics and pandemics that may arise in the future could affect the global economy in ways that cannot necessarily be foreseen at the present time. A health crisis may exacerbate other preexisting political, social, and economic risks. Any such impact could adversely affect the portfolio’s performance, resulting in losses to your investment.

Investing involves risks, including the potential loss of principal. Financial markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments.  These risks are magnified for investments made in emerging markets. Currency risk is the risk that fluctuations in exchange rates may adversely affect the value of a portfolio’s investments.

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Scott Garfield

Scott Garfield, 

Senior Managing Director, Private Equity and Credit

Manulife Investment Management

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