Paul Carbone of Pritzker Group threw a bit of cold water on enthusiasm for co-investments in private equity, arguing that direct investments offer a better fit outside conventional fund structures, at least for family offices.
Family offices “like the asset class” but have run up against limited access to the best funds and other issues, said Carbone, managing partner at Chicago-based Pritzker Group Private Capital, at the PartnerConnect Midwest 2014 conference in June.
Citing a study by advisory firm Altius Associates released in March, Carbone said co-investments may contain a substantial risk of poor returns, even with a reasonably sized portfolio. While co-investments do avoid the conventional “2 and 20” fee structures of private equity funds, investors face “adverse selection” because they do not necessarily get access to the best deals. Their investment portfolios also become concentrated in too few investments, he said.
Direct investing is a superior strategy because it outperforms fund investments and significantly outperforms co-investments, he said. More than half of family offices with private equity holdings are taking part in direct investing and “more are interested,” he said.
–By Steve Gelsi, Senior Editor, Buyouts
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