As merger and acquisition (M&A) activity remains muted in Asia, general partners (GPs) are increasingly attracted by co-investment opportunities, reshaping the investment landscape.

“When M&A slows down, companies often pivot towards forming strategic partnerships instead of pursuing acquisitions,” Collwyn Tan, co-head of Asia investments at private markets asset manager Hamilton Lane, told AsianInvestor.

The trend is becoming more pronounced as GPs navigate an environment where valuations are adjusting and liquidity remains at a premium, Tan said.

In the first half of 2024, while the value of M&A deals rose by 5% compared to the first half of 2023, overall transaction volume fell by 25%, continuing a downward trend that started in 2022, according to PwC.

GPs appear to be exercising greater caution when deploying their capital.

“The GPs are becoming a lot more selective,” Tan explained, reflecting a significant change from the aggressive investment climate in 2020 and 2021. “They wouldn’t want to spend their dry powder only to have to come back and fundraise in this current market.”

This cautious approach has led GPs to seek co-investment arrangements over committing to large deals that might carry excessive risk.

Moreover, GPs are looking for partners who can help close deals. “They want someone strategic to them, helping them to consummate the transactions,” Tan noted.

FAMILY OFFICES

Such collaborative investment environments also offer the advantage of allowing firms to share equity burdens as they build their investment theses, according to Tan.

For family offices, the decision to engage in co-investments often hinges on their existing relationships with GPs. Those offices managing extensive networks have at times found them to be overwhelming, according to Tan.

“The more sophisticated family offices with many relationships are starting to trim down their portfolios, concentrating their relationships into a more manageable number,” he said. “This selective approach allows them to focus on quality co-investments while maintaining a robust network.”

By contrast, Tan added, newer family offices entering the private market see co-investment as a strategic advantage: “It sidesteps blind pool risk and is typically way more economical. In some cases, GPs require your capital but wouldn’t dare to ask you for fees.”

Source: Schroders report on The “capital gap” and why it spells opportunity for co-investments

With larger deals struggling to close, family offices are securing more favourable positions at the table. Reduced fees and better governance terms are some of the rewards for helping to close funding gaps.

LEGAL DISTINCTIONS

Distinct legal and structural approaches are shaping up for family offices participating in co-investments as either “financial” or “strategic” investors, according to Ho Han Ming, partner at law firm Reed Smith. 

Ho explained that financial investors mainly seek wealth preservation and returns while strategic investors seek benefits for the principals’ underlying business objectives and initiatives, such as an acquisition.

Strategic investors often face complexities akin to those of M&A deals and necessitating more comprehensive protections. For financial investors, key risks include exit conflicts, reputational concerns, and geopolitical challenges, according to Ho.

“Exit disputes are common when co-investors have differing timelines,” Ho said, emphasising the importance of clear exit strategies. He also highlighted reputational risk, especially in heavily regulated industries like tech and healthcare, where thorough due diligence is crucial.

With geopolitical tensions rising, family offices may struggle to access opportunities in certain regions. Ho recommended incorporating protective provisions to mitigate each risk category.

LEVERAGING NETWORKS

Family offices can also be attracted to co-investments where they are able to leverage existing relationships and sector-specific knowledge.

Manish Tibrewal, co-founder of multi-family office Farro Capital, shared that family offices are often hesitant to co-invest with new or unfamiliar partners.

“They prefer to deal only with their trusted circle and are generally circumspect about co-investing with unknown parties,” Tibrewal said.

Meanwhile, the real estate sector continues to attract co-investment interest, he said, particularly because of tangibility and long-term value propositions.

““Family offices feel more comfortable co-investing in real estate, where they have expertise and can maintain control over the deal,” Tibrewal said.