Investors should focus less on whether to use funds, direct investments or co-investments and more on whether they have the expertise and infrastructure to manage private-market investments themselves, according to Nikolas Charalambous, managing director of KENDRIS Capital Limited.
Writing for the Cyprus Investment Funds Association (CIFA), Charalambous said the growing accessibility of private markets had prompted more investors to question whether professionally managed funds remained the best way to gain exposure.
“Why should I invest through a fund instead of investing directly or participating in co-investments?” is a question he said he encountered regularly from entrepreneurs, family offices and institutional investors.
Direct investment can appear attractive, particularly because it offers greater control, potentially lower fees and the ability to decide exactly where capital is deployed.
Co-investments have added to that appeal by allowing investors to participate alongside established fund managers, often with lower fees than those charged by traditional fund structures.
But Charalambous argued that this comparison overlooked one of the most important factors in private-market investing, namely the capabilities required to execute an investment successfully over many years.
“The real comparison is therefore not between funds and direct investments, but between institutional investment capability and individual investment capability,” he said.
Private-market investments require substantially more work than simply identifying an attractive opportunity, he said.
Opportunities must be sourced, assessed, valued, negotiated and structured, while investments then have to be monitored throughout their lifecycle before an eventual exit.
A professionally managed fund brings these functions together, allowing investors to benefit not only from the assets held by the fund but also from the institutional investment process behind them, Charalambous said.
That process includes investment committees challenging assumptions before capital is committed, risk managers examining potential losses, and legal and tax advisers assessing transaction structures.
Portfolio managers then monitor investments, while governance arrangements are designed to ensure decisions remain aligned with the fund’s strategy and investors’ interests.
Such infrastructure is built up over years of experience and can be difficult for individual investors to replicate, he said.
Charalambous stressed that this did not mean direct investment was inappropriate.
Investors with dedicated investment teams, established governance arrangements and substantial resources can gain meaningful advantages from investing directly, including greater control and flexibility and potentially lower fees.
It is therefore unsurprising that large pension funds, sovereign wealth funds and sophisticated family offices have expanded their direct investment programmes, he said.
However, greater control also means greater responsibility, with investors taking on the work normally performed by a fund manager.
They must source opportunities, carry out due diligence, negotiate commercial terms, manage risks, oversee portfolio companies and ultimately plan and execute exits.
“Greater control is valuable only when accompanied by the capability to exercise that control effectively,” Charalambous said.
Without the necessary expertise and infrastructure, he warned, an investment that initially appears cheaper could ultimately prove more costly.
Co-investments, meanwhile, can sit between traditional fund investment and direct ownership.
They allow investors to increase exposure to selected opportunities while benefiting from the sourcing, due diligence and execution capabilities of an experienced investment manager.
This has made co-investments an increasingly important part of institutional portfolios.
Charalambous said, however, they generally worked best alongside rather than instead of funds.
A diversified fund can provide broad market exposure and diversification, while selective co-investments allow investors to place greater weight on individual opportunities in which they have stronger conviction.
The world’s largest institutional investors consequently tend not to regard funds, direct investments and co-investments as mutually exclusive choices.
Instead, each can serve a different purpose, with funds providing diversification, governance and specialist expertise, direct investments offering greater control where internal capabilities justify it, and co-investments allowing investors to increase exposure to selected transactions.
“The objective is not to choose one structure over another, but to combine them in a way that aligns with investment objectives, available resources and long-term strategy,” Charalambous said.
He suggested that investors should therefore ask themselves a different question.
“Do I possess the expertise, governance and infrastructure necessary to achieve better outcomes without one?” he said.
For many investors, professionally managed funds remain the strongest foundation for long-term wealth creation, while direct investments and co-investments can become useful additions as their capabilities develop.
“The most sophisticated investors do not define themselves by the structures they use,” Charalambous said.
“They define themselves by their ability to select the right structure for the right purpose at the right time,” he concluded.