Co-investment and directs to eclipse primary funds, buyers say
Investors expect that PE direct investments and co-investments will overtake traditional fund investing as the largest capital source within five years, according to a survey that exposes the shifting dynamics in LP-GP relations.
Investment bank Houlihan Lokey's LP Compass, its first survey of the combined co-investment and directs market, polled 56 of the market's most active buyers. Some 78% expect combined volumes to set a record in 2026, beating the $215 billion the bank estimates the market reached last year: a record $161 billion in directs and $54 billion in co-investment.
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The reasoning, per the report, comes down to visibility. Investors can underwrite a specific asset and model its returns directly, which is not possible when committing blindly to a primary fund.
As LPs look for more direct and co-investment opportunities, almost three in four survey respondents said they are willing to pay variable carry on co-investments, tied to managers meeting certain return thresholds. Directs buyers are less willing: 46% would accept variable carry, and just 13% would pay more than 20%. More than a quarter of co-investors still insist on paying no carry at all.
In Europe in particular, the appetite for co-investment opportunities is reflected in the fundraising for co-investment funds, which are commingled vehicles that invest directly in companies alongside the general partners.
These funds have already raised €6.3 billion (around $7.3 billion) so far this year, nearly on par with the €7.2 billion raised in all of last year, according to PitchBook data. However, capital is increasingly concentrated, as the number of funds fell for a fourth consecutive year to just 14 closes.
Pantheon Global Co-investment Opportunities Fund VI was among the largest co-investment funds to close this year, raising $3.2 billion together with its related vehicles. The fund, which was closed in July, followed the firm's record deployment of around $1.3 billion across 30 co-investment deals last year.
Partners Capital Investment Group also held the final close of Merlin IV in February, raising over $1 billion in commitments. The strategy focuses on lower mid-market and mid-market buyouts.
