Single family offices in Singapore and Dubai cautioned about the potential pitfalls of co-investing as a fee-reduction strategy, warning of hidden costs and administrative challenges that could offset any savings and erode returns.
“If your co-investment program is not properly thought out or constructed….ultimately, whatever fees you’re saving could be lost when you come to mistakes or potential losses within your portfolio,” said Majella Healy, chief investment officer of Small House Capital, a Dubai-based single-family office.
While some co-investment opportunities sound great on a no-fee basis, Healy stressed that investors need to carefully assess what is saved, and what may be lost, and whether the opportunity is worth such risks.
Majella Healy
Small House Capital
“You have managers offering the ability to get in with smaller ticket sizes, but often you’re overloaded with fees, so the net return potential may be impacted,” Healy said during a recent Preqin webinar.
Small House Capital’s portfolio is heavily skewed towards alternatives. It mainly invests in private equity funds, while opportunistically investing in secondaries and private debt.
It also looks at co-investment and direct opportunities occasionally.
Asset owners in Asia sometimes seek co-investment in alternative investments when they want to access certain deals or lack expertise in certain markets or when they can’t meet the ticket size, which is more often the case for smaller limited partners (LPs) such as family offices.
Veiverne Yuen, partner at Blauwpark Partners, said that in Southeast Asia and Hong Kong over the past few years, there is a trend to allow “significantly smaller” commitment sizes than before in fund investment in alternative assets in general.
Veiverne Yuen
Blauwpark Partners
“I don’t think this is necessarily the most cost-effective way of getting capital in. Because they are fee structures that cost a lot for distribution – at least in Singapore – to go to private banks, which add another cost layer on,” Veiverne said in the same webinar.
Blauwpark Partners is a Singapore-based single family office for the Dutch family Blauwpark.
The family office runs a classic endowment-style strategic asset allocation and is heavily invested in alternatives — especially the more illiquid ones. It makes 20 to 25 fund commitments per year.
Blauwpark Partners doesn’t prefer co-investment or direct investment in alternative fund investment to avoid operating overheads.
It also finds the risk-return trade-off, or the net return after considering the actual cost, is often not attractive enough, according to Veiverne.
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