By Muskan Arora
Co-investment decision makers at the State of Wisconsin Investment Board (SWIB) recently discussed their methodology for choosing co-investment managers.
Kirk
Wolff, private equity and co-investments officer and Chris Eckerman, head of
co-investments at $156 billion (SWIB) revealed that they are focusing more on lower middle
and middle markets for their co-investment deals during a recent podcast.
Within The SWIB podcast, they spoke about prioritizing managers’ track records and performances in addition to a strong management team, sector
expectations and strong, risk-adjusted returns.
Wolff
and Eckerman aim to strike 20-to-30 co-investment deals every year, despite “having
the flexibility to go smaller or larger than that.”
“We
review four to five times more the number of opportunities to get us down to
that 20 plus that we end up doing. We think being selective in this manner has
helped us achieve our returns,” Wolff said.
The
size of the allocation depends on whether the commitment, within the private
equity bucket, is coming from the current return sleeve, which includes debt, or
the private equity sleeve.
Each
allocation ranges from $30 million to $50 million from their private equity allocation, whereas from the
current return sleeve, the allocation is between $25 million to $40 million for each co-investment opportunity.
SWIB
has a recommended target of 18%, or $28.08 billion, for the private equity sleeve in 2024.
The target range is between 10%, or $15.6 billion, to 26% or $40.56 billion. There has been a
3%, or $4.68 billion, increase in the target from 2023.
Challenges
Eckerman highlighted the potential for adverse selection as one of the
challenges they face during co-investments, alongside following quick timelines
to provide feedback.
Adverse selection refers to when managers seek to maximize exposure to
their best deals and reduce exposure to less attractive ones through
co-investment.
“We tried to provide quick feedback in a couple of days, and we often
only have weeks to decide whether to participate,” Eckerman said.
The co-investment team works together with the legal and operations team
to carry out deals effectively within a tight time frame.
Eckerman said that lower leverage deals typically have multiple organic
growth levers which are placed to perform well through economic cycles. Despite economic turmoil, co-investments performed well.
“In the early days of the pandemic we focused on existing portfolio
company risks, but SWIB’s long-term investment horizon enabled us to
proactively seek opportunities while the financing markets were dislocated,” Eckerman added.
Market outlook
Wolff spoke about a lack of distribution to investors as he dove deeper into the challenges of private equity fundraising.
“The M&A market was relatively soft compared to the prior two years, and without
deals being sold, and therefore capital returned to LPs, there was just a more
limited amount that they were able to invest into new private equity funds,” Wolff added, as the fundraising market continues to be challenging in 2024 as
well.
However,
SWIB has the flexibility to be an early closer with a fund and can often “drive
the terms for those funds,” which can lead to more co-investment or lower net manager
fees.