LP direct investing
Factual definition
LP direct investing is direct investment in a company by an investor that also invests as a limited partner, rather than investment through a pooled fund. The investor may invest alone or with partners and may acquire a minority or controlling interest.
Lead a direct deal after earlier co-investments
Hypothetical: after three co-investments, a pension investor independently manages a fourth, direct deal. Assume that deal has no external fund management fee or carried interest.
Internal staff, advisors and transaction expenses still cost money; other direct-investment arrangements may include fees.
Budget for the work that moves inside the institution
Hypothetical direct investment. An institution invests US$20m in a company, pays US$300,000 for diligence at closing and spends US$200,000 on internal oversight at each of the next five year-ends.
Assume no external management fee or carry and no other costs. Undiscounted cash committed to the investment and this oversight is US$21.3m, not US$20m.
Assign responsibility for the board seat, financial reporting, follow-on funding and a management crisis before approving the deal. If the person who led diligence leaves, another person must still know the contracts and operating plan.
The ILPA diligence questionnaire is designed for manager review, but its questions about teams and investment processes also identify work an institution must arrange when investing directly.
Compare the direct route and a fund investment using consistent cash-flow dates, costs, risk and available expertise. Avoiding one fee arrangement may improve economics, but it does not make the diligence, governance or liquidity needs disappear.
A co-investment history is useful evidence of experience; it does not by itself establish readiness to lead an investment.
Where LP direct investing fits
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