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Matt Malone explains how direct and co-investments can lower fees and offer tactical portfolio adjustments
Key Takeaways
- Direct and co-investments can lower the overall fee load since they may carry low or no fees compared to traditional fund investments.
- By utilizing Opto's and clients' networks, clients can share opportunities, enabling broader access to interesting transactions within private market portfolios.
- Direct or co-investments allow for strategic shifts, like increasing exposure to AI or real estate, tailored to specific market trends or opportunities.
Transcript
When working with clients on building private market allocations, we get a lot of questions and talk to clients a lot about direct investments or co-investment, and these would be investments that we'd be doing in a vehicle, not through an external third-party fund or manager, but potentially directly with a private company. And there's really three reasons to look at adding direct or co-invest to a portfolio.
And when we talk to clients about them, one is potential reduction in the overall fee load, because a lot of times co-investments and direct investments may carry low or no fees compared to a fund investment. Two, would be to take advantage of our network and our clients' network. Many of our clients see a lot of interesting transactions that they want to share across their client base, and by capturing that in the private market portfolio we're building for them, we can help all their clients get access to that rather than just a smaller group.
And then, of course, the third reason why you might want to add those types of investments into a private markets portfolio is to express a tactical shift or a tactical lean. For example, if you wanted to have more exposure to AI, or if you wanted to have more exposure to opportunistic real estate in a certain sector, you may want to add some direct investments or some co-investments into a portfolio in order to create the dynamic within that portfolio that you will benefit from developments in those areas.
Now, of course, there's also some risk with adding a direct or co-invest to a portfolio in that you may reduce diversification if you have a large position in a single company. And the way we handle that typically is we think about positioning, set position sizing relative to an overall portfolio. So you may be able to take a smaller position in direct and co-invest and still get some of those advantages, but not add as much risk as you would if that were to be a larger portion of a portfolio or if an individual client were to invest in that deal directly. So we think it's a really interesting way to add and to customize the types of portfolios that we're building for clients here at Opto.
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