Adverse Selection and the Performance of Private Equity Co-Investments

Friday December 15, 2017
  • Working Paper


Investors increasingly look for private equity managers to provide opportunities for co-investing outside the fund structure, thereby saving fees and carried interest payments. In this paper we use a large sample of buyout and venture capital coinvestments to test how such deals compare with the remaining fund investments. In contrast to Fang, Ivashina and Lerner (2015) we find no evidence of adverse selection. Gross return distributions of co-investments and other deals are similar. Coinvestments generally have lower costs to investors. We simulate net returns to
investors and demonstrate how reasonably sized portfolios of co-investments significantly out-perform fund returns.