There are three key models of direct investing: solo, partnerships and co-investing. Figure 3 below summarizes them.
The solo model represents direct investing in its purest form. With solo direct investing, an institution not only retains the investment decision, but usually also identifies the investment and performs – or directly oversees – critical investment activities, including due diligence and ongoing asset management.
Under the partnership model, an asset owner forms a partnership with one or more asset owners or, sometimes, with an asset manager, to invest together in a specific deal or a series of deals over time. The partnership approach can be attractive because it allows for the pursuit of larger deals, enables a broader range of deal sourcing and can help mitigate risk – for example, a foreign investor investing in partnership with a local investor having on-the-ground knowledge and relationships.
The co-investing model is something of a middle ground between direct and indirect investment. Typically in this model, an institution invests in a fund run by an asset manager and then may have the opportunity to make direct investments alongside that fund’s manager. Since fees are generally not charged on co-investments, institutions making co-investments can leverage the skills of the asset manager while paying lower fees in aggregate.