Head of Private Wealth, Pantheon
Doug is Head of Private Wealth where he focuses on the origination and marketing of registered and unregistered offerings to wealth management clients globally. He previously worked in the Merrill Lynch Alternative Investments group where he was involved in screening, structuring and offering private equity and private real estate investments through the Bank of America Merrill Lynch Private Wealth Management platform. He has a BA in Economics from Tufts University. Doug is based in New York.
For 36 years, Pantheon has partnered with industry-leading private equity firms to deliver private equity opportunities to Pantheon clients. Pantheon serves as the adviser to the AMG Pantheon Fund, which offers accredited investors access to a diversified private equity portfolio in a ’40 Act registered vehicle. As of August 31, 2018, co-investments represent a meaningful allocation of the AMG Pantheon Fund at 89% of the private equity portfolio.
How has the co-investment market evolved over the last decade?
While LP demand for co-investment has certainly increased, we believe there has been a greater supply of co-investment opportunities available in the market. More GPs are aware of the relationship benefits with LPs of offering co-investment and are doing less partnering with other PE firms on deals than they may have done 10 or 15 years ago. GPs have also become increasingly comfortable and confident that they can syndicate co-investments successfully with their LP base. They might not have had that same confidence 10 or 15 years ago. We believe the net effect of both of these factors has driven greater co-investment supply.
Besides reduced fees, what are some of the benefits of co-investment for LPs?
Benefits include more investor control over the deployment and pacing of their capital as well as where and how that capital is invested. Other advantages include being able to build out diversified portfolios to help fill in certain sectors, geographies or vintages to which they may want more exposure. From a portfolio construction point of view, this would be the one area that an LP has more control over how its capital is invested and when. That’s certainly attractive to LPs.
What level of due diligence do you need to do and what capabilities does an LP need to have?
Co-investors will get access to a fair amount of diligence. GPs typically provide their investment memo, third-party consultant reports, industry research, comparables valuations and their base model. There are other things co-investors can do to help augment information provided by the GP. One is to look at the track record of deals in their own portfolio, whether it’s through primaries, co-investments or secondaries, and understand how that sector has traded historically, prices buyers have paid and returns these buyers have generated investing in the sector. Co-investors also may be able to talk to other GPs they have relationships with that have experience in the space. Also, it is quite important to analyze the deal and the fit with the manager. Is this a type of investment where the manager can deliver and has in the past delivered differentiated value?
Is adverse selection — the GP offering their LPs the less attractive deals as co-investment opportunities — an issue?
Intuitively we’ve felt there’s less risk of adverse selection for a couple of reasons. First, these LP relationships are very important to the GP in terms of raising their next fund, so we can’t see a GP potentially disadvantaging their LPs by showing them a co-investment that might be less attractive than what they would normally do. And this assumes they know upfront the relative performance of the deal, which is unlikely. And second, these deals are going into the GP’s fund and they’re going to be important drivers of performance, because co-investments tend to be larger than the average deal in the fund, which is part of the reason they need the co-investment. These larger deals will be very big drivers of performance but also will be scrutinized by LPs in future fund diligence, whether they did the co-invest or not, because they represent a meaningful part of the fund.
Now co-investment has become a more established part of the private equity landscape, are investors becoming more creative in how they approach this strategy?
Traditional LP syndications certainly represent the majority of what we see, but co-investors have been considering broader sets of opportunities and have been more creative in what they’ll do. This can include warehousing deals, where an LP might speak up for a larger check size to give the GP deal certainty, and then allow the GP to syndicate a piece of it out to smaller investors later in the process or post-close. The other area warehousing could be applicable is if the GP is raising a new fund and hasn’t had a close yet, but they want to do a deal. An LP could underwrite the equity and allow that GP to claw a piece back for the fund once they’ve had a first close. There are cases where LPs are effectively co-bidding alongside the sponsor, and because of that they’re willing to underwrite a large check, get involved earlier, but also underwrite their share of the broken deal expenses if a deal doesn’t close.
This document is not an offer to sell securities issued by AMG Pantheon Fund, LLC (the “Fund”). All investors in the Fund must be “Accredited Investors,” as defined in Regulation D under the Securities Act of 1933.
Operating results for co-investments during a specified period will be difficult to predict. Such investments involve a high degree of business and financial risk that can result in substantial losses.
Nothing contained in this document is intended to constitute legal, tax, securities or investment advice. The general opinions and information contained herein should not be acted or relied upon by any person without obtaining specific and relevant legal, tax, securities or investment advice.
AMG Pantheon Fund, LLC is distributed by AMG Distributors, Inc., a member of FINRA/SIPC.
AMG Distributors, Inc. is a wholly owned subsidiary of AMG Funds LLC and Pantheon Ventures (US) LP is majority owned by Affiliated Managers Group, Inc. (AMG).
Pantheon Securities, LLC, a member of FINRA/SIPC, serves as the sub-distributor for the Fund.Disclosure