Co-Investing: The Best Structure for Goldilocks Investors
In the fairy tale, Goldilocks and the Three Bears, Goldilocks stumbles upon the home of three bears while they’re away and proceeds to sit in their chairs, eat their porridge, and sleep in their beds. She’s tries out all the options before she finds one that is “just right.”
Many real estate investors today are like Goldilocks – they’re looking for opportunities that are “just right” – not too passive, not too direct. Not too risky, not too safe.
Co-investment may be the solution for these Goldilocks investors who seek more control over their portfolios and more access to innovative investment strategies.
Co-investment is not new. In fact, it’s proven structure that is very commonplace in the private equity and VC world.
Through co-investment, investors are able to participate in deals that have the potential to be highly profitable without paying the usual high fees. They like the flexibility and efficiency that it offers.
Co-investment isn’t a new concept in private real estate either. In fact, it even has a nickname: sidecar.
The popularity of co-investments, or sidecars, seems to grow exponentially every year. As investors increasingly look to be more targeted and thoughtful about their investment strategies, co-investment has emerged as a way to enter new markets and access new property types without the hassle of direct ownership. At the same time, co-investment gives investors more control and discretion than a typical GP/LP structure.
As co-investment becomes more popular, the line between it and other investment vehicle structures is blurring. A lot of people are confused about co-investment because the term is used somewhat loosely in commercial real estate.
At its roots, co-investment gives investors the opportunity to work together in a way that is mutually beneficial. It usually involves shared ownership (of portfolio or fund), shared objectives and strategies, and shared decision-making.
Historically, co-investment in the commercial real estate sector was restricted to large institutional investors with massive amounts of capital. Managers used co-investment to acquire pricey assets that they wouldn’t otherwise have the capital to buy. With co-investment, these large institutional investors could deploy capital into high-quality properties without having the hassle of actively managing individual properties.
Smaller institutional investors, as well as family offices and individuals, haven’t had as much access to co-investment. But that’s changing; it’s hard to find a real estate investment firm that’s not willing to at least consider co-investing.
Co-investment gained a lot of traction after the Great Financial Crisis (GFC). Commercial real estate managers that invested directly into properties realized that their portfolios weren’t diversified enough and that there was limited upside in the existing investment options.
Many investment firms find co-investment to be far more appealing than traditional GP/LP structures. Co-investment fills the space between direct investment and passive or silent investment. It’s “just right.”
Shrewd investors have realized that co-investment can provide better returns and more favorable economic terms including reduced fees. Investors who have participated in a number of co-investment deals contend that co-investing gives them exactly what they want – enhanced yields, additional alpha, and the ability to build their ideal portfolios.
That’s what Archer is all about – enabling investors to gain exposure to the markets that appeal to them, maximize their returns, and minimize the risk associated with market entry.
Co-investment also allows investment firms and managers to work with familiar sponsors as well as build relationships with new ones. At Archer, we view co-investment as an opportunity to partner with a variety of investors that share our vision. It’s a way to grow relationships and build the foundation for future partnerships.