LPs show growing appetite for co-investment opportunities

Institutional investors are increasingly looking to co-investment as a means of actively managing returns from real assets, experts tell Agri Investor.

Co-investment opportunities were integral to both the fundraising and deployment strategies of the recently closed $433 million Blue Road Capital agribusiness fund, which is expected to draw several hundred million co-investment dollars once the fund is fully deployed, sources told Agri Investor.

This reflects a growing trend of LPs seeking to make direct investments alongside GPs in the real assets space, according to Howard Kaplan, president of Farmvest, a consultancy that advises more than a half dozen LPs, including pension funds, high net worth individuals and an endownment, on investments in farmland, timber and other renewable resources.

“Real asset portfolio managers have been talking about doing co-investment funds for quite some time now, and in the last several years it’s caught more traction,” said Kaplan.

In the past, he said, cumbersome approval processes limited the ability fof many institutional LPs to take advantage of co-investment opportunities. But increasingly, boards are approving co-investment discretionary funds to solve this problem.

New Mexico Education Retirement Board senior portfolio manager of real assets, Mark Canavan, told Agri Investor co-investing has become integral to the fund’s real assets strategy.

“Some funds are more or less guaranteed to do co-investment flow and it’s just a matter of whether the LPs can take advantage of that or if those co-investments are being sold to somebody outside of the LP base,” said Canavan.

“When we invest with somebody, we pre-negotiate that we have to be shown co-investment flow, if there is co-investment flow.”

NMERB’s relationship with Blue Road Capital began with an $8 million co-investment in the fund’s acquisition of National Pecan, which it followed with a $30 million commitment to the fund.

Co-investing allows the pension to strategically overweight its exposure to areas where it sees opportunity and has the added benefit of reducing costs from fees, said Canavan. But perhaps the most important benefit is the level of insight it provides into market activity and the practices of asset managers.

Co-investing puts LPs in a position to evaluate not only the deals that GPs make, but the deals they walk away from, he said.

“You are underwriting side by side with GPs. You’re getting information in real time as they get it. You get to see what they execute on, what they don’t execute on. Sometimes what’s more informative is the deals people don’t do, ” he added.

However, co-investment opportunities require a deeper knowledge of a specific asset class than a more general investment strategy through a fund manager, said Kaplan. That means institutional investors may need to narrow their focus to a particular sub-sector when pursuing a co-investment strategy.

“There would be a serious limitation in the ability of pension funds to know enough about all of the asset classes that they cover down to the level of detail to make well-informed decisions in specific assets in all of those asset classes,” Kaplan added.

Instead, LPs are more likely to seek specialised advisory help to choose between multiple co-investment options presented by GPs. That can be a challenge in the agri sector, where there are limited resources of investment expertise.

“To be a good judge of co-investments in agriculture, you need a deep understanding of agriculture investments on the ground,” he said. “[But] there’s a lack of advisory expertise in the agriculture category.”